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Alex Kimani

Alex Kimani

Alex Kimani is a veteran finance writer, investor, engineer and researcher for Safehaven.com. 

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Iran Plays Hardball In Drive To Export Crude Oil

After a lengthy layoff, Iran appears poised to officially rejoin the ranks of oil exporters--maybe as early as 2022--if Tehran and Washington are able to strike a new nuclear deal and Iran returns to the Joint Comprehensive Plan of Action (JCPOA).

Negotiators from Iran and five world powers resumed negotiations on Monday in a bid to restore Iran’s landmark 2015 nuclear deal. In the 2015 deal, five world powers, namely the UK, France, Germany, the U.S., Russia and China, granted Iran sanctions relief in exchange for curbs on its nuclear program before the Trump administration scuttled the deal and reinstated sanctions in 2018 . 

The latest round of talks in Vienna--the eighth--opened after a 10-day hiatus that allowed the Iranian negotiator to return home for consultations. The previous round came after a five-month adjournment and was marked by tensions over new Iranian demands thanks to the arrival of a new hard-line government in Iran. Iran has steadily abandoned all JCPOA limits since the American withdrawal and is now enriching uranium to 60% purity--a short, technical step from weapons-grade levels. 

The U.S. is cautiously optimistic about the fate of the new round of negotiations, saying it’s too early to say if Tehran has come to the table with a more constructive approach. It’s a sentiment shared by its EU counterpart:

If we work hard in the days and weeks ahead, we should have a positive result. But it’s going to be very hard-difficult political decisions have to be taken,” Enrique Mora, the European Union diplomat who chaired the talks, said after the opening session.

So far, indirect nuclear talks between the United States and Iran have hit stumbling blocks after Iran walked back on earlier concessions. The Biden administration is still seeking a return to mutual compliance to the 2015 nuclear deal with Iran but has also said it’s “preparing for a world in which there is no return”.

"It is not our preference. Every day that goes by is a day where we come closer to the conclusion that they don't have in mind a return to the JCPOA in short order," said an official, who briefed CNN reporters by phone, referring to a lack of compliance. 

Among the key demands Iran has made is that the United States and its allies allow it to export its crude oil.

The million dollar question right now is how much oil can we expect from Iran if a new deal is struck. More importantly, will investors start flocking to a post-sanctions Iran?

The Iran Wildcard

After all, Iran’s former oil minister Bijan Namdar Zanganeh is on record saying that his biggest dream has always been to increase Iran’s oil output to six million barrels per day; earn $2 trillion through oil exports over the next two decades and use the income to invest in the country’s development.

Obviously, such a level of production would cause considerable jitters in the delicately balanced oil markets.

But how realistic are Iran’s oil ambitions and how much do the oil bulls need to worry about another large producer potentially muddying the waters for everybody?

Last year, Biden rejected former president Donald Trump’s decision to withdraw from JCPOA or the 2015 nuclear deal which critics say is inadequate in stopping Iran from eventually acquiring nuclear weapons. Negotiations kicked off in early April, but that did not stop Tehran from increasing its uranium enrichment program and passing a new law to limit International Atomic Energy Agency (IAEA) inspections. The Islamic Republic initially allowed limited monitoring to go on for another three months until May 24 but rejected a new agreement with the IAEA to continue monitoring its activities related to JCPOA.

But as OilPrice.com contributor Simon Watkins correctly predicted back in June, Iran’s dire economic situation was likely to force its hand into eventually accepting monitoring and signing a new nuclear deal sooner rather than later. Watkins noted that Iran’s foreign currency reserves had greatly dwindled and stood at ~$10 billion, down from $114 billion just before the U.S. withdrew from the JCPOA in May 2018, while the country’s gold reserves are now insignificant. Watkins reckoned that the rate of foreign currency-denominated capital flight out of Iran was running at ~US$4-4.5 billion per month, meaning the reserve could run out in under three months.

And it appears he was right on the money: In September, Iran gave consent to the U.N. nuclear watchdog to service monitoring cameras at Iranian nuclear sites after talks.

It’s an open secret that Iran has been flouting U.S. sanctions by applying several cloaking methods to evade detection and sell its crude oil to China. 

According to Standard Chartered, Iran has increased output 0.6mb/d y/y, and a further 1.4mb/d could return during 2022 if the Vienna talks succeed.

Source: Standard Chartered

Iran’s current production of ~2.5M b/d is nearly a million b/d less than the 3.48 million b/d the country pumped in 2016 and 1.3 m b/d less than the 3.79 million b/d it managed in 2017. So Stanchart’s figures appear to be within the ballpark of what Iran can manage over the next year or so.

But boosting production from the current 2.5mb/d to 6mb/d could take several years at the very least.

Over the past four decades, Tehran has miserably failed to adequately re-invest its oil income into its production capacity or diversify its economy. In fact, since the 1979 revolution, the Islamic Republic has never at any point in time been able to produce more than 4 million bpd.

To complicate matters further, foreign investors have mostly stayed away from Iran’s economy in the four decades since the Islamic Republic was established. In sharp contrast, foreign investments--mostly oil-related-- in its Arabian peers including Saudi Arabia totaled more than $170 billion from 2006-2012, and have continued to grow at an annual clip of 10 billion dollars since. 

Part of the problem here is that the state-controlled economic model wastes more than $50 billion a year on oil and gas subsidies to keep its citizens docile. The result is that Iranians enjoy the cheapest gasoline and electricity prices of anywhere on the globe, but have to contend with high unemployment and inflation due to an economy that relies too heavily on petrodollars.

There’s little reason to believe that Raisi’s administration will do much to reform the economic model given the latest spate of populist promises of even more subsidies.

By Alex Kimani for Oilprice.com

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  • Mamdouh Salameh on January 02 2022 said:
    The author’s optimism about a return of open Iranian oil exports in 2022 is misplaced. Iran will never accept anything less than a lifting of all sanctions against it with no new limitations on its nuclear and ballistic missile development programmes. That is why a lifting of sanctions will never see the light of day now or ever because the positions of the United States and Iran are irreconcilable. In a nutshell, the only deal Iran will accept is one on its own terms.

    Iran can indeed afford to play hardball in the negotiations with the P5 +1. It has very successfully been evading US sanctions and exporting an estimated 1.5 million barrels a day (mbd) or 71% of its pre-sanction exports. Moreover, more than 1.0 mbd are being reportedly imported by China in open defiance of US sanctions.

    Iran works on the premise that the United States can neither prevent it from acquiring nuclear weapons shortly if it wanted nor wants to risk a war with it because that would be the end of US interests in the Middle East. Furthermore, China and Russia won’t allow Iran to collapse either militarily or economically in the event of war.

    Even in the event of sanctions being lifted, Iran could only add 650,000 barrels a day (b/d) to the market being the difference between its pre-sanction and post-sanction exports.

    The maximum Iran could produce in a no-sanction scenario is estimated at 3.70-3.75 mbd. Iran has never ever achieved the 4.0-mbd quota allowed to it by OPEC.

    Moreover, the only time Iran produced 6.0 mbd was in the early 1970s under the Shah but in so doing it has damaged its major oil reservoirs some of which are still damaged for lack of investments or being beyond repair.

    You quoted Oilprice.com contributor Simon Watkins as saying that Iran’s dire economic situation was likely to force its hand into eventually accepting monitoring and signing a new nuclear deal sooner rather than later. But Simon Watkins is absolutely wrong because he might not understand what drives the Iranian’s mentality.

    There is an aspect of the Iranian mentality that would undermine the impact of any economic sanctions. It is the martyr’s streak that the story of Ali, revered by Shi’ites as the true heir of Prophet Mohammed, inspires. This sense of martyrdom means that Iranians might prove not only unexpectedly resilient but could even draw strength from any economic hardships provided the leadership portrayed the nuclear cause as both just and patriotic.

    The Islamic leadership of Iran has been doing exactly that portraying the United States as Satan and its designs on Iran as satanic.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London

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