Despite the tentative deal struck between major world powers and Iran, short-term oil supply is unlikely to change.
For years the world watched and waited for Iran to come to the negotiating table. The Iranians began with a few centrifuges, and today they have tens of thousands of centrifuges spinning with the capacity to produce weapons grade uranium. The Iranians claim to be pursuing a peaceful nuclear program, despite the continued threat of annihilation against fellow Middle Eastern country Israel. Iran continues to be a state sponsor of terrorism with support for groups like Hamas, Hezbollah and Syria’s president Bashar Assad. All of this the world knows. Political observers on the left and the right in Congress are highly sceptical of any negotiations with Iran. The liberal administration, headed by John Kerry, seeks engagement over isolation. This policy has all but dumbfounded members on both sides of the aisle, in spite of these outreach initiatives. In defence of the negotiations process, Kerry has intimated that the global powers have managed to halt any further uranium enrichment for a period of six months. In return for unimpeded access to uranium nuclear facilities, the Americans and the global community have agreed to ease up dramatically on sanctions.
Appeasement or Engagement?
Kerry himself admitted to providing sanctions relief in the form of $7 billion to the Iranians. Whether this money will be used to continue funding terrorist groups in the region and globally is unknown. At stake is more than regional stability; a potential nuclear arms race can be triggered if Iran is allowed to enrich uranium to weapons grade capacity. The Iranians for their part continued to stonewall in the negotiations process – this despite the fact that Mahmoud Ahmadinejad has been replaced by a seemingly moderate politician. Rouhani is fully aware of the fact that inflation in his country is running at 40%. Since his election, the Iranian currency has depreciated by more than 50%. The Iranians desperately need sanctions relief and that is the sole reason why the Obama administration believes they have come to the negotiating table. In much the same fashion as other pariah governments seek to save face, the Iranians don't want to be seen as conceding too much in the negotiations process. They are claiming that any deals that are struck are on their terms, while the West is claiming victory in the form of a halt in uranium enrichment. There is a lot at stake other than the uranium issue; Iran is one of the world biggest suppliers of oil. This fact has not been lost on the other negotiating partners in the deal – China, Russia, South Korea, Japan and India.
Iranian Economy in Ruin
The Iranians realize that to boost their economy they need to be exporting more oil. The thinking on the US side is that if America continues to impose harsh sanctions, the Russians, Chinese, Japanese, South Koreans and Indians will simply increase their consumption of the Iranian oil thus nullifying the effects of US sanctions. The US wants to be seen as being part of a multinational effort where consensus exists among all the major players in the form of a unilateral approach to sanctions against Iran. Scores of analysts agree that it is possible that the price of oil will drop below $100 per barrel if the long-term outlook is positive and Iran begins exporting more oil to the world. Several analysts reported that they perceive the price of oil to drop between $4 and $29 in the event that such a deal can be made. Iranian exports of oil are estimated in the region of 1.2 - 2.5 million barrels daily. In years gone by, Iran has been known to supply almost double that – so a dramatic improvement in their economic fortunes can be recorded if sanctions are eased. In any event, no short-term expectations exist for a drop in the price of oil – either in the region or globally. Naturally there is Saudi Arabian opposition to the deal as the Saudi's have been increasing their oil production owing to the sanctions imposed on the Iranians. High oil prices benefit all the existing oil-producing countries, especially those in the Middle East.
Terms and Conditions of Negotiations with Iran
The precise details of the interim deal with Iran are not 100% clear. While there have been selloffs in Brent crude oil as the risks seem to have diminished, supply of oil is unlikely to change. The six world powers have ensured that there will be severe limits on Iran's oil sales. At the heart of the sanctions is an embargo on all oil exports to the EU. That may be changed in the event of a final deal in the next six months ending in May 2014. The United States granted South Korea, India, Japan and China waivers from imposing sanctions on Iran provided they reduced their overall purchases of crude oil. Even with the requirements that were agreed upon, conditions have been eased so that these countries can continue for the next six months at the pre-agreement rates of import. In spite of the fact that the Indians would like to increase their purchase of Iranian oil, they aren't likely to do so for fear of evoking the wrath of the United States. The price of Brent crude oil was recently at $110 p/b, but that has decreased sharply in recent days. For all intents and purposes, it does not seem likely that any major changes will take place in the short term – including the price of oil. While no definite red line has been set for an agreement, the six-month period seems to enjoy tremendous support by the six countries negotiating with Iran for a peaceful resolution to the nuclear issue.