Nuclear Talks, Glutted Markets Offer Iranian Economy Little Relief

The seven-month extension of nuclear talks between Iran and six world powers agreed to in Vienna means Iran can expect little relief from sanctions that have hamstrung its oil exports and whacked its economy. What’s more, even if Iran can secure some respite during the next round of talks, translating that into greater oil-sector earnings will be a tough slog, made all the harder by the sustained drop in crude oil prices.

Monday, Nov. 24’s decision to blow past another self-imposed deadline and push back final resolution of Iran’s nuclear program until next summer removes any chance of extra barrels of Iranian oil flooding into an already oversupplied market. That may offer some succor to OPEC members, who meet Thursday to decide whether and how to halt the five-month slide in oil prices. But it won’t help Iranian leaders still banking on a recovery of oil exports to bolster the Iran’s tottering economy; late last week, Iran’s oil minister optimistically pledged to double oil exports if the talks were successful.

Talks will continue, reportedly starting again next month, and Iran still holds out the hope of securing relief in exchange for a final deal with the six global powers: Britain, China, France, Germany, Russia, and the United States. There is always the chance that a Republican-controlled U.S. Congress could ratchet up pressure on Iran by increasing sanctions next year, which would make it even harder for the country to increase oil exports to right its reeling economy.

But even if negotiators meet without having to dodge congressional torpedoes, Iran’s woes will likely continue well into next year, at the very least, because of a confluence of factors: Unwinding limitations on Iranian oil exports will take time; it will take even longer to juice oil production enough to support substantially more exports; and depressed oil prices mean each barrel of crude is worth about one-third less than just a few months ago.

Even if negotiators make progress soon, Iran’s oil-export limits can’t be reversed with the flick of a switch. Legal barriers on pieces of the export puzzle, such as shipping, insurance, and banking, must be overcome. What’s more, relief likely would be probationary: It would be temporary, reversible, and subject to Iran’s continued and demonstrated compliance with the terms of the nuclear deal. That means energy-sector players, from insurers to financial intermediaries, would be leery of jumping back in with both feet.

"There must be a relief on all of those levels in order to create a pathway for Iran to sell more oil and earn more revenues," said Elizabeth Rosenberg, director of the energy program at the Center for a New American Security.

"There’s a difference between what happens on paper and in practice. Negotiators can promise economic relief, but that is dependent on whether private-sector actors are going to feel confident and comfortable moving forward," she said. She wrote a paper on the subject earlier this year.

Then there’s the question of pumping more oil to have enough additional barrels to export. Iran produces about 2.8 million barrels daily. Iranian officials, led by Oil Minister Bijan Namdar Zangeneh, have vowed to rocket production up to 4 million barrels per day in a few months if sanctions are lifted. The International Energy Agency figures Iran could increase production modestly, if not quite that much, with increases between 500,000 and 800,000 barrels a day in a matter of months.

But other oil-market experts are skeptical that Iran’s battered oil industry can turn on the afterburners. Even with the limited sanctions relief offered under the current nuclear talks, Iran only increased oil production by a little more than 100,000 barrels a day this year. The country needs foreign capital and expertise to goose production of oil fields, especially those that have been underutilized thanks to the limits on exports. That makes visions of an extra million barrels of Iranian crude a pipe dream, some analysts say.

"I think there are serious technical issues that will prevent Iran from increasing output rapidly," said Richard Mallinson of Energy Aspects, a consultancy. He said that upstream challenges would make it tough for Iran to boost oil output much above 3 million barrels a day for the next 18 to 24 months.

And then there’s the problem of actually selling more Iranian oil in a market that doesn’t need more crude. Benchmark oil prices have fallen about 30 percent since June. Oil prices in New York and London treaded water Monday as traders weighed the not-with-a-bang-but-a-whimper extension of the nuclear talks against the chances that OPEC will cut output Thursday to shore up prices.

For now, OPEC watchers are still split. Some expect that the group will slash production by more than 1 million barrels a day to send prices up again. Others question whether the oil cartel has the willpower and the muscle to unilaterally cut production and cede market share to non-OPEC rivals, including the United States.

As it is, lower oil prices compound the effects of the sanctions limiting Iran’s oil exports, reducing the country’s earnings for what it can sell today and making it tougher to sell additional barrels.

Some OPEC members, such as Saudi Arabia, can live with lower oil prices for the time being. Iran, which is facing budget deficits north of 20 percent next year, is not one of them. Bloomberg reported that Iran may propose cutting OPEC output by 1 million barrels a day — cuts that would have to be shared, to a greater or lesser degree, by all the cartel’s members.

But the more important point is that for countries in the cross-hairs of U.S. and Western sanctions, lower oil prices can hurt petrostates’ economies as much or more than sanctions themselves. Russian Finance Minister Anton Siluanov said on Monday that the crude slump costs Russia about $90 billion to $100 billion a year, while Western sanctions cost the Russian economy about $40 billion a year.