On paper, the deal struck with Iran on Sunday leaves in place strict sanctions limiting the amount of oil that Iran can sell at about 1 million barrels per day. That’s 60 percent below the 2.5 million barrels Iran was exporting each day in 2011. In practice, though, the deal does provide some relief that will allow Iran to increase its exports by a few hundred thousand barrels per day.
That’s because in recent months, Iran’s exports have fallen below the 1 million barrel cap. Although Iran’s exports averaged roughly 1.1 million barrels per day through the first nine months of 2013, according to the International Energy Agency, Iran exported just 715,000 barrels per day in October. That drawdown could be the result of countries such as China, India, and South Korea wanting to demonstrate they were decreasing the amount of crude they were buying from Iran, says Kevin Book, managing director of ClearView Energy Partners, a Washington (D.C.) consulting firm.
The recent decrease also reflects a bigger problem Iran has: insuring the tankers filled with the crude it is allowed to sell. Part of what has made the sanctions so effective over the past two years wasn’t just the limits put on the amount of crude that countries could buy from Iran, but that Iran was cut off from the commercial shipping insurance market, an industry dominated by the British. Under the European Union sanctions imposed in 2011, British insurance firms have been banned from dealing with Iran. That has forced Iran to shut more than 1 million barrels of daily oil production and stockpile crude like mad. According to reports from the IEA, Iran is sitting on some 37 million barrels of crude stuck in tankers they can’t insure.
Now, in a little-noticed caveat included in the deal signed Sunday, these U.K. firms are again permitted to insure shipments of Iranian crude. That alone should boost Iran’s exports by anywhere from 200,000 to 400,000 barrels per day, says Book, getting Iran back closer to the 1 million barrels-per-day cap and perhaps even threatening to exceed it in some months.
Overall, though, Iran’s stature as an oil power remains greatly diminished as a result of the sanctions. Its oil exports will remain well below their traditional level, depriving the government of its biggest source of revenue. Its economy is still expected to shrink this year and next, and double-digit inflation is not likely to abate. The deal does give Iran access to about $4.2 billion in oil sales money frozen in offshore bank accounts. The U.S. and EU are also loosening other industrial trade sanctions on Iran’s imports and exports of cars, airplane parts, and certain petrochemicals and precious metals. That should translate into about $3 billion in revenue.
Still, as noted by Tom Pugh, commodities economist at Capital Economics, the combined $7 billion in extra revenue pales in comparison with the $80 billion in revenue the sanctions have cost Iran over the past two years.
While the current deal won’t lead to an immediate increase in oil supplies, Pugh believes it may lay the groundwork for a future deal that could significantly increase Iran’s ability to export crude. Any deal that does that would contribute to a decline in oil prices to about $90 a barrel by the end of next year, Pugh writes.