Despite being home to massive oil and gas reserves, Iran’s energy sector has been far from steady over the past few decades. Iranian energy has had more than its fair share of ups and downs thanks to extended periods of political turmoil following the major upset of the Iranian Revolution of 1978 and 1979, but even since the premiership of Mohammad Mossadegh in the 1950s patterns of volatility can be seen in the nation’s energy history.
Now, thanks to the United States’ decision to fully reinstate sanctions on Iran since November 4th, Iran is likely to hit another, tougher rough patch when it comes to maintaining and further developing its high-potential, long-suffering energy industry. The political turmoil is not limited to Iran’s relationship with the United States--there is also considerable tension between the current Rouhani administration and its Iranian constituents, with longtime rivals in the Middle East, and different factions between the current Iranian regime itself.
The Rouhani administration has lost a considerable amount of confidence after the U.S. under Trump withdrew from the Nuclear Deal, also known as the Joint Comprehensive Plan of Action (JCPOA), a huge pillar of the administration’s platform. The deal was not in place long enough for Iranians to see real economic growth from its institution, and now, after the deal’s dissolution, Iran is faced with a collapsing currency, bad unemployment rates rapidly growing worse, and significant shortages of imported goods like medicines thanks to the renewed sanctions. Making matters worse, in the face of deteriorating economic hardships and growing discontent with the Rouhani administration, Iran has been plagued by widespread protests.
Under renewed sanctions Iran will not just lose out on trade with the U.S., but with many other international trade partners allied with the U.S. as well. Iraq, which imports a significant amount of gas and electricity from Iran, has so far been granted a waiver to continue doing so without jeopardizing their relationship with the United States, but it’s unclear how long this will be the case, as the U.S. has been looking to switch Iraq’s imports from Iran to Turkey. At the same time, Turkey continues to buy oil and gas from Iran as well, and was also granted a temporary waiver in November to continue doing so.
In the absence of U.S. support and dollars, Tehran has had to strengthen its ties with other economic powerhouses, including Russia and India. Iran already had a (somewhat shaky) relationship with Russia, as they have worked together in backing the Assad regime in Syria. Russia, which has a strong interest in politically undermining the U.S. and its economic strong arming, also has talked of a hefty "goods for oil" swap in order to help Iran bypass U.S. sanctions, but have been withholding when it comes to any specifics. India has also found a way to keep trading in Iranian crude oil by way of banking loopholes involving five escrow accounts in Iranian banks.
So far, however, the world’s single most important market for Iranian crude oil (as well as Saudi crude) has managed to avoid taking sides in the tense Middle Eastern market. China has continued to buy crude from Iran, which is an absolutely vital relationship for Iran to maintain if their economy has any hopes of surviving the newest round of U.S. sanctions. While it’s not in Beijing's best interest to sow any more discord with the United States, they are certainly not inclined to bend over backwards for the U.S. either, as the trade war (which includes tariffs on U.S. oil and gas) between the world’s two biggest economies continues to escalate.
If the U.S. decides to be less lenient with its waivers or Iran sours any of the important trade relations it has managed to build or maintain in the wake of reinstated U.S. sanctions, it will spell out major trouble for the Iranian energy sector and for its already wavering economy as a whole.
By Haley Zaremba for Oilprice.com
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