Iran’s Dire Straits: Why The Islamic Republic is Still in a Tight Spot Despite Sanction Relief

By: Travis Cady

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There has been a lot of speculation about the future of the Persian Gulf after the signing of the nuclear deal with Iran in July. Taken by itself, the deal should set back Iran’s nuclear program and allow it to recoup some of the losses that it suffered from years of multinational sanctions. But what are the consequences of an economically unshackled Iran? Does it mean it will become a more aggressive and powerful agitator, thereby boosting Sunni-Shiite tensions throughout the region? Does it portend a more open and collaborative Islamic Republic in order to attract foreign investment and boost its economic prospects? Ultimately the answers to such questions are currently unknown as they depend on the internal workings of the Iranian regime and population. What does seem certain, however, is that Iran is still in a tight spot even with the repeal of sanctions.

Even if Iran behaves itself over the next five years, at least in regards to following the arrangements of the nuclear deal, it still behooves the Saudis and other Sunni states to prevent their rival from gaining strength. Persistent low oil prices are crippling Iran’s energy sector as it does not have the wealth funds of the Saudis and other Gulf Coast Cooperation (GCC) countries. Sanctions have set back Iran’s oil and gas production, and full recovery will take years. Additionally, the political environment in Iran is still not the most conducive to foreign investment needed to get its energy production and export up to snuff, and immediate warming to western investment seems unlikely as it is still pushing its “Resistance Economy”. What can the Islamic Republic do to try and improve its geopolitical position? This article attempts to provide an outline of the Iranian position at present.

Negotiations_about_Iranian_Nuclear_Program_-_the_Ministers_of_Foreign_Affairs_and_Other_Officials_of_the_P5+1_and_Ministers_of_Foreign_Affairs_of_Iran_and_EU_in_Lausanne

The ministers of foreign affairs of France, Germany, the European Union, Iran, the United Kingdom and the United States as well as Chinese and Russian diplomats announcing the framework for a Comprehensive agreement on the Iranian nuclear programme (Lausanne, 2 April 2015). – Image from Wikimedia Commons

Iran is estimated to hold the fourth largest proved oil reserves in the world and the second largest natural gas reserves. The sanctions imposed in 2012 took a large bite out of the Iranian energy sector, both because of the flight of foreign investment needed to develop and maintain some of its more complicated fields, as well as because of the reduced internal financing and economic prosperity that the sanctions imposed. Now that the sanctions are scheduled to roll back, we can expect to see Iran try to revive its oil and gas industry with the help of international companies such as Italy’s Eni.

However, things aren’t as rosy as they seem. The world is currently experiencing remarkably low oil prices, which affect most fossil fuel products including natural gas. In such an environment, Iran will not be able to break even on its current oil endeavors, much less attract foreign capital for exploration and development of new projects on a large scale. Even if Iran is able to regain its pre-sanctions levels of production, a feat that will likely take up to five years, it will not be making the same kind of money that it was in 2012. Unlike Saudi Arabia and other wealthy oil states such as Qatar and the U.A.E, Iran may not have the ability to weather the low price scheme long-term. With the United States becoming a significant oil and gas producer, and therefore buying much less on the international market, we are unlikely to see prices rebound anytime soon (barring a major supply shock). Oil previously meant for the U.S. will be redirected to other markets, continuing downwards price pressure. So what are Iran’s options?

A possible option would be to try to increase the price of oil by slowing global supply. A disruption in the Persian Gulf shipping lanes would certainly boost energy prices, but unfortunately for Iran they are much more vulnerable to such a closure than their rivals. While it is true that Iran could likely accomplish at least a partial closure of the strait of Hormuz if it were so inclined, the involvement of the U.S. and assured retaliation by the Saudis and other CGG countries would prevent Iranian shipments as well.

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The Strait of Hormuz links the Persian Gulf to the Indian Ocean.  It is the busiest oil shipping lane in the world.  Fears of mining by Iran and the closure due to regional conflict has been a concern for decades. – Image from Wikimedia Commons

Additionally, Saudi Arabia has the option of the nearly 5 million barrel per day East-West Pipeline that circumvents the Persian Gulf by piping oil to the western red sea. Iran, on the other hand, is almost entirely dependent on the Persian Gulf to export its own product. Its northern shipping facilities on Caspian Sea are currently offline and were for the purpose of smaller exchanges with Azerbaijan and other Central Asian countries, not for major export operations. Even if it could develop the infrastructure, its unlikely that the Caspian could accommodate the volume necessary to keep Iran afloat. In fact, if the U.S. were to disengage from the region in coming years it would be far more beneficial to Saudi to disrupt Iranian shipments than the other way around (although its neighbors would not be happy). There is already a scheduled U.S. carrier gap in the region, which might portend a lack of will to police the region as funding falls and the importance of the gulf to U.S. energy security plummets.

So, if the Iranians can’t manage to boost oil prices what does its future look like? The fear of resurgent Iran and a less attached U.S. certainly has the GCC countries worried, as evidenced by their massive military spending and counter-rebel strategy in Yemen (the Yemeni rebels are considered a proxy of Iran). While many initially saw the Saudi push to lower oil prices as a strategy designed to harm the U.S. shale industry, it may be a much better tactic against Iranian development and is therefore unlikely to be reversed anytime soon. Therefore, Iran could go after a softer target (perhaps Azerbaijan, but that could invoke the ire of Turkey and other neighboring states), hope that Russian-European hostilities break out to boost prices through another avenue, or a potential land grab in Iraq or even Kuwait (which would likely lead to a large scale conflict that could harm Iran more than it would help). Overall, despite the fears of a new and improved Iran current trends aren’t looking great for the country. Asymmetric warfare via proxy organizations such as Hezbollah are certain to continue, but any immediate expansion by Iran is unlikely to help its position, and such actions would be born more likely from desperation than opportunism.


IMG_6264 (1)Travis Cady is the managing editor of ExPatt Magazine and a master’s candidate at the Patterson School specializing in International Commerce. He is currently a working as a researcher on global energy security.

He previously graduated from the University of Louisville studying political science and philosophy and has traveled in both Europe and Asia. His interests include international trade networks and diplomatic relations.

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