While Russia’s invasion of Ukraine may be front and center of today’s media coverage, the ongoing JCPOA discussions with Iran in Vienna need to be watched carefully. Under pressure from a growing military conflict in the heart of Europe and steep energy and commodity prices, it now seems that Tehran’s rulers are going to get what they have wanted for so long. While the specifics have not yet been divulged to the public, insiders appear very optimistic that a deal will be reached soon. Some insiders have indicated that an agreement would see Iran quickly return to international markets. The underlying reasons for the recent rapid progress in negotiations, however, hint at the potential of diplomatic and geopolitical miscalculations. Some analysts are warning that the US Midterms and European elections are partly influencing the decisions being made at the negotiating table. High energy and commodity prices are threatening the electoral success of Biden and other European leaders. Perceived domestic pressure to do something about higher gasoline prices or power bills could have forced Western politicians to be much more flexible to Iran’s extremist regime than would have otherwise been the case. Strategic decisions appear to be being pushed through based on misconceptions about the impact that Iran’s vast oil and gas reserves could have on energy prices. At the same time, the ongoing military build-up and regional aggression of the Raisi regime are being largely ignored.
The main underlying political failure here appears to be a failure to recognize that the removal of US sanctions, which were put in place by US President Donald Trump, will not stabilize the Middle East at all. To open up the global financial sector and commodity markets to Iran will be a major mistake, as it gives the extremist regime a new lease on life, while hydrocarbon revenues will be pushed not only into the Iranian economy but also to military procurement, development of ballistic missile systems, drones, and the financing of Iranian proxies in Iraq, Syria, Lebanon, Gaza, and Yemen. The financial gains of the Iranian government will not lead to a push for democratization or strengthen the public interests of Iranians.
At the same time, Iran’s connection to and support of Russia is apparently being ignored. Russia has been using Tehran’s forces in the battle for control of Syria. Moscow clearly understands that the use of Iran in the Middle East has not only pushed Western powers out of the region but can be used as a bargaining chip with major Arab powers, such as Saudi Arabia, the UAE, and even Egypt. Washington and Brussels will understand that any action they take with Iran will need to be justified to Israel and its Arab allies. Russia is clearly using Iran to maintain its foothold in the Middle East and to make sure Israel is wary of getting involved in Ukraine. Israeli tech would significantly strengthen Ukraine’s position if the country was to get more involved.
The obvious reason, according to most analysts, for appeasing Iran is to bring additional volumes of crude oil, condensates, and natural gas onto the market. The optimism about Iran’s capabilities in regards to this, however, is misplaced. There will be no Tsunami of new Iranian oil hitting the market. Even under US sanctions, Iran has been exporting vast volumes, almost all heading to Asian clients, such as China. To expect an additional 1-2 million bpd of Iranian oil, partly to counter the possible removal of Russian Urals under sanctions, is completely unrealistic. The vast floating storage volumes, as has been reported by some already, are not the products, crude, or quality the market will be looking for. If an agreement includes lifting the oil sanctions on Iran, it will take more than 2 months for exports to reach markets worldwide. No doubt Iran will try to increase and revamp its production levels, but that will all take time as well. In the most optimistic analysis, Iran could increase production within months by 1 million bpd, reaching around 3.7 million bpd in 2023. That would be if sanctions are totally lifted, investments are poured in, and technology is available.
The tricky part of it all, especially in light of Russia’s invasion of Ukraine and new financial regulations and reporting requirements, is the financing of trade and the transfer of cash to Iran. A new agreement could include the transfer of billions of dollars held in escrow accounts around the world. To check and verify those flows would require changes to the parties that are currently on sanctions lists, such as IRGC and others. Dealing with the Iranian oil sector is dealing with Iran’s military arm of extremist IRGC groups, the ones currently fighting in Syria, Iraq, and supporting Hezbollah.
To sacrifice security worldwide, to expand Iran’s power projections in the Middle East, and to increase the power of Raisi is the cost of a nuclear deal right now. The benefit of such a deal would likely be a short-lived 1 percent boost in the global oil supply. Western politicians and leaders are known for their short-term visions, but Ukraine is an example of how other players on the world stage appear to be considering much longer timelines. Short-term gains of around $8 per barrel are expected, but this price increase could lead to a much higher mid-term price spike if the Middle East, already facing the prospect of food shortages, is destabilized by a revived Iranian regime.
By Cyril Widdershoven for Oilprice.com
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