EU sanctions took full effect against Iran on the 1st of July, and the US are hoping that they will be the final straw that breaks the camel’s back; putting sufficient economic pressure on Iran that they will be forced to negotiate on their nuclear enrichment program. The IEA believes that the sanctions will reduce Iranian exports by 1 million barrels per day (bpd), which, considering the Iranian government relies on oil exports for 65% of its revenues, could help the US achieve its desire.
However, in truth the sanctions are not having the impact that was hoped for. Between January and June this year, before the majority of the sanctions started to operate, oil prices averaged a record high of $114 per barrel, mostly due to the threat of US sanctions against Iran, enabling Tehran to save $100 billion. This means that they have quite a war chest to fall back on when things do start to become tight. In fact with China and India, two of the world’s largest growth markets, still buying from Iran, the sanctions are unlikely to have any serious effect.
With the sanctions looking less and less likely to succeed, the West maybe better off trying a different tactic; removing the sanctions all together. That way Iran will be free to export its 3.5 million bpd of production, a move that would flood the global market with excess supply and cause prices to crash. If Saudi Arabia keeps its production at 10 million bpd, the prices could fall as low as $60 per barrel, and this will definitely negatively impact on the Iranian budget. The Iranian riyal has already fallen 30% this year, inflation is over 30%, and youth unemployment is at high levels, if the government starts to lose revenue public confidence will decrease, leading to unrest and potential riots. This has more chance of sending Tehran back to the negotiation table.
By. James Burgess of Oilprice.com
James Burgess studied Business Management at the University of Nottingham. He has worked in property development, chartered surveying, marketing, law, and accounts. He has also…