What’s Really At Stake With The Iran Nuclear Deal

Recently, I wrote on these pages that a remarkable turnaround was taking place in the President’s fortunes. It’s an impressive display of rising from the depths of falling popularity last fall, and it is starting to be felt in many areas, with major impacts on the future of energy.

At his lowest point, the U.S. President was widely regarded as a lame duck, shedding influence and power, and on a down-hill slide.

This was followed by a number of embarrassments, with one of the worst coming from Russia, when it chose to provide sanctuary to Edward Snowden who revealed that the U.S. was hacking the strategic communications of its closest allies.

More damaging, the revelation came at the worst possible time for the U.S., seriously discrediting its campaign to enlist allies against alleged Russian and Chinese hackers.

This was followed by another embarrassment where the U.S. utterly failed to prevent U.S. allies from joining the Chinese-sponsored Asian infrastructure bank. It seemed that the doomsayers were proving correct about America's decline and fall.

Since then, Obama has been on a roll, with victories in Congressional trade agreements and at the Supreme Court with decisions that removed legal and constitutional challenges to the President’s health program, and gay marriage.

Following hot upon these achievements were the successful negotiations with Cuba and Iran, that went far beyond expectation, climaxing with the signing of the historic Iran nuclear agreement.

Even more surprising was the President's ability to marginalize the powerful lobbies and opponents of these agreements, including hard-liners in the U.S., Iran, Israel, and the Gulf Kingdoms.

Not Your Father's Sanctions

In the past, the effectiveness of sanctions was often questioned because of the difficulty of tracking compliance. The result was that targeted countries easily hid and continued banned activities. The sanctions golden rule: if you can't track them, you can't enforce them.

But current sanctions are nothing like they were in the past. The difference is that technology has lifted surveillance to unprecedented levels. What with spy satellites, drones, and sophisticated listening devices, the U.S. now has the capacity to pierce nearly every form of communication and transaction. That is the secret weapon which enables the west to impose iron bound constraints that can level just about any economy.

Whether the participants in the recent negotiations will comply with the terms of their agreements, only the future can tell. But there’s little question that none would have come to the table without the sanctions.

Recall also that only first stage sanctions had been imposed on Cuba, Iran, and Russia, with each nation clearly warned that far worse lay in store if targeted activities continued.

The message was hardly lost on the ever pragmatic President Putin, who despite brave words of resistance, suddenly saw that it was to his country’s benefit to cooperate with the U.S. and its allies, particularly in the Iranian nuclear negotiations, and the ongoing war in Syria and Iraq.

Nor was the message lost on China either, who also suddenly found it in their interest to stop island building in the South China Sea, and began negotiations with its neighbors over territorial claims, as urged by the U.S. and its allies in the region. China 'acting poor' when Russia recently came calling for financial help also smacked of western influence. Related: Who Is Leading The Charge In Energy Storage?

Contrary to their rhetoric, Iran and Russia were deeply chastened by sanctions, even more so by the oil price collapse, and have agreed to major concessions. It's no accident that both countries are also becoming ever more important in the world's anti-terrorism campaign, an effort clearly being coordinated with the U.S.

OPEC Support

Playing into Obama’s hand was a different sort of victory taking place during the same period. That was the Saudis leading OPEC to defend their traditional market share by flooding the oil markets.

The ensuing trade war against competitors has caused every other major oil producing country and oil companies to cut future development plans. Importantly, the oil glut reinforced the damaging effects of sanctions on targeted countries.

Some conspiracy theorists have claimed that the U.S. Administration conspired with the Saudi King to create an oil glut by over-producing, directly aimed at crashing the Russian economy, where energy accounts for nearly 50 percent of its budget.

U.S. Investment Bank, Morgan Stanley recently reported that the Saudi's were over-producing by some 1.5 million barrels per day in a market with a surplus of around 800,000 barrels per day.

The Bank added that the oil markets' fall could be worse and last longer than the one created 1986, in which Saudi Arabia grew tired of shouldering the burden of production cuts and decided to flood the market in an effort to pursue market share.

With Iran expected to return to markets, thereby adding to the glut, the bank also stated that these current moves made the risk in oil markets "historically unanalyzable," a red alert to the investment community.

Oil Glut Ricochet

The Saudis enthusiastically took up the opportunity to lower global energy prices, ostensibly claiming they were not aiming to kill off rivals in Russia or the U.S., but merely that they were not the highest cost producer.

There were also other unexpected reversals. It has been widely reported that the Gulf Kingdoms are outraged over the U.S. drawing closer to Iran, as well as the U.S. distancing itself from the wars in the Middle East. Evidence for this view can be found in the Saudis' multi-billion dollar deals with the Russia, which fly in the face of U.S./EU sanctions.

The clincher in the Russian-Saudi entente may just have occurred with the sudden ISIS terrorist attacks in Saudi Arabia.

The Saudis are all too aware of the threat that ISIS presents, the monster that some claim they created, and are now badly in need of military assistance, especially with the U.S. declining full scale military engagement in the region.

The Glut’s Toll

The result of the ensuing glut is a fast declining industry that is now willingly accepting new production cutbacks, while oil producing countries like Russia, Canada and Australia, are edging dangerously close to recession, with their currencies hitting six year lows. Related: Canadian Oil Benchmark Falls Off A Cliff

As reported by CNBC, global job losses in the oil industry have reached over 141,200, with severe ripple effects across supporting industries. The U.S. is by no means immune to the downtrend, where current lay-offs in the energy field are approaching 71,000, and expected to climb.

U.S. Strategy for the Middle East

If, as it seems, Obama is back on top as a world leader, it's important to understand his overall strategy and the likelihood of success.

The consensus amongst energy mavens is that if the Iran nuclear deal eventually leads to a withdrawal of sanctions, the results will be increased Iranian supplies, forcing prices lower by some $10 per barrel, according to World Bank estimates.

But Iran’s nuclear deal is about much more than the price per gallon. What the U.S. and its allies are trying to accomplish is no less than the reversal of political hostilities that have marginalized Iran for over thirty years and fueled hostility across the region.

As the President recently stated, the nuclear agreement is also meant to restore Iran as a regional leader in the Mid-East and turn a hostile relationship into at least a neutral one. That could go a long way in changing the political structure of the Middle East, while reducing the West’s dependency on its traditional allies in the region.

That’s not to say that the U.S. and Iran are destined to become close allies, but to recognize that they have important shared interests in combatting radical Islam that could lead to far greater cooperation.

There are some who claim that despite denials, the U.S. and Iran are already cooperating in the West’s battle against ISIS in Iraq and Syria. If so, that could go far in supporting Obama's goal to pivot from the Middle East and towards Asia.

As stated here, another overriding U.S. goal is to prevent Iran’s drift eastward into a commercial and military alliance with Russia and China, as a partner in the recently formed Shanghai Cooperation Organization, the Eurasian Economic Union, and Silk Road project. Instead, the U.S. wants Iran positioned as a competitor to Russia for EU and Asian energy markets, and as a bulwark against Russian and Chinese expansion.

The problem for the administration is that hard-liners at home and abroad, having failed to kill the deal, are continuing their efforts to stop any broader entente emerging between the Iran, its neighbors, and the world.

Here, the road is likely to be far less smooth for Obama. Unlike the nuclear deal that was undertaken under the banner of a UN resolution, any further U.S. political deals with Iran would be subject to congressional approval, something few experts view as forthcoming.

What with these formidable barriers to entente, a continuing drift eastward by Iran towards a closer commercial and military relationship with Russia and China remains a strong possibility.

But I think that the nearly two years of nuclear negotiations with Iran, if it accomplished nothing else, restored Iran to the position of a recognized regional power. Related: BP Refinery Outage Could Push Down Oil Prices

Iran is also unlikely to forget that both China and Russia voted in the UN to support sanctions against Iran. Nor is the fact likely to be ignored that Russia also declined to breach sanctions to deliver a previously contracted system of advanced missile defense systems to its erstwhile ally. Russia's sudden close relationship with the Saudis is also not likely to sit well in Tehran.

For Iran, an over-riding goal in the deal was the repeal of sanctions, enabling the country to regain its former status as OPEC's third largest producer. With that goal more realistic in light of a successful conclusion of the recent negotiations, Iran is unlikely to adopt policies to antagonize its newfound partners.

Instead of becoming captive to either Russia or China, Iran is far more likely to promote itself as an anti-terror partner with both west and east, while building investment markets with both sides of the 'great game' for its own benefit.

At the same time, Iran is leading the movement to form a united front against terrorism, partnering with the U.S., the Gulf Kingdoms, Turkey, Russia, and Syria.

Conclusion

In a region often beset by conflicts, with hardliners at home and abroad working against it, the odds are high against the success of the American strategy and the Iran deal.

Israel's Prime Minister Netanyahu has turned the deal into a partisan issue in the midst of a presidential election campaign, in which it will undoubtedly play a major part.

Leading U.S. Democrat Congressmen have gone rogue against their administration, voicing opposition to the deal. Advocates on both sides are now raising the specter of war as the sure results of their opponents’ plans. Can pictures of mushroom clouds be far behind?

Arrayed against the deal opponents are the powerful interests of the international business community, now impatiently chomping at the bit to get into Iran's virtually untapped market.

Nearly every major western country has recently sent trade missions to Iran in anticipation of sanctions being lifted. Representatives included major international oil companies, banks, and manufacturers. Their enormous influence and immense wealth will weigh heavily in resolving the issue.

A surprising announcement came that may hint at trending opinions in Europe: Yesterday Switzerland became the first country in the world to lift sanctions on Iran, in support of the nuclear deal.

For the President’s supporters, the deal holds real promise for the creation of a partnership of former adversaries united against terror.

If it proves successful, the world may finally have cause to breathe a sigh of relief, but as nearly everyone involved agrees, the outcome is still far from certain.

By Robert Berke for Oilprice.com

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