A Shifting Industry: Iran Enters the Oil Market

A Shifting Industry: Iran Enters the Oil Market

This article is part of a series that will be released before the end of 2015, drawing from The Contour‘s annual print issue titled Upheaval, Revolution & Tragedy: The World of 2015, which can be found online at The Contour: Print Edition

The price of oil, just like that of any other commodity, is driven by supply and demand. In the past decade, rapidly developing economies such as China’s presented one of the biggest markets for oil. Since 1982, OPEC, the Organization of the Petroleum Exporting Countries, was able to maintain mandatory quotas for its members. Oil prices reached unprecedented highs of over $140 per barrel. In 2008, however, the global economic recession led to the collapse of the oil industry. The fiscal year of 2014-2015 marks the oil industry’s crash, with global oil prices having more than halved since 2013. At the same time, the U.S. as well as Russia and other OPEC countries have increased production in order to maintain their market share.

Iran Enters the Oil Market

Ever since 1979, when the U.S. Embassy in Tehran, Iran, was stormed and 52 hostages were taken for 444 days, diplomatic ties between the U.S. and Iran have been severed. The Americans still have not reopened their embassy, and the American government froze Iranian assets, most of which are still inaccessible. With the recent landmark nuclear deal, however, the diplomatic ties between the two estranged nations will begin to mend. On Sunday, October 18th, 2015, known as “Adoption Day,” the U.S., EU, and Iran started procedures to fulfill their commitments to the deal. Iran will submit to nuclear inspections to ensure they don’t have nuclear capabilities; in return, the sanctions against Iran will be lifted on “Implementation Day” in early 2016. Not only is the deal significant for geopolitical reasons, but additionally, the lifting of the trade embargoes would stimulate Iran’s economy.

In recent years, Iran’s economy has been shrinking, with sanctions blamed for a $17.1 billion dollar loss in export revenue for 2012-2014. The sanctions have put strenuous pressure on Iran’s economy and the trade embargoes have shut out western companies from some of the world’s richest oil deposits. Since President Hassan Rouhani took office in 2013, he pulled the country out of recession, lowering inflation levels from 40% two years ago to 17% currently. When trade resumes, Iran’s GDP may rise from the current level of  2.8% to 5%.

As a result of the lifting of the sanctions, Iran will be able to produce more oil in attempts to reclaim its market share. With the sanctions posed to lift, Iran will seek to utilize its oil fields, which are the fourth largest in the world. Iran is expected to double crude oil production as soon as sanctions are lifted, which may lead to a lighter bill at the gas pump. By 2016, oil prices may drop by 14% as Iran exports 500,000 more barrels of oil a day. Currently, Iran exports 1.1 million barrels of crude oil a day, but there are hopes to reach the pre-sanction level of 2.2 million barrels a day, which was last reached in 2012.

Big oil importers, like the U.S. and Europe, will benefit from the decreased energy costs, while OPEC countries like Saudi Arabia, the world’s leader in oil exports, will lose out. As a result, a Saudi-Iranian rivalry over oil exports could be on the horizon.

Saudi Arabia: An Oil Rich Veteran