NS3040 Fall Term 2014 Iran Sanctions: No Nuclear Deal

Overview of Nuclear Talks Oxford Analytica, “Iran: Oil Sector Faces New Sanctions Without Deal,” October 2, 2014 Ongoing nuclear talks Deadline November 24 after extending an interim arrangement in July Deal would be expected to set severe limits on Iran’s nuclear activities to result in a progressive lifting of nuclear related sanctions imposed by the U.S, EU and UN Agreement far from certain How will Iran’s oil sector be affected by talks’ failure in the short and longer term? 2

Impacts of Sanctions Impacts A lengthy period of slow economic contraction and stagflation is likely without a deal As sanctions erode, China in particular would take more Iranian oil By 2020 Iranian oil production and exports may be around 1 million barrels/day, below 2011 levels of Iran’s main buyers would fill gap from other Middle East suppliers, most likely Saudi Arabia and (depending on security issues Sanctions on Iran’s energy sector have been steadily ratcheted up in recent years resulting in significant under-performance relative to massive potential 3

Key Sanctions on Energy Sector The key sanctions on the energy sector include: Investment in Iran’s energy sector and the transfer of technology The supply of refined products to Iran The shipping or insurance of Iranian oil exports The repatriation of Iranian funds from oil sales, except to by goods from the purchasing country; and The export of petrochemicals or precious metals (temporarily suspended in the July package) The most significant sanctions Completely ban the export of Iranian crude oil to EU countries; and Aim progressively reduce crude sales to other countries 4

Iran Sanctions Developments I Currently only six countries permitted to buy Iranian oil: China, India, South Korea, Japan and Turkey They have been expected to cut their purchases on a continuing basis Falling oil production As a result crude oil production fell from around million barrels a day during 2011 to 2.77 million b/d in 2014 Country eared $114.8 billion from oil exports in 2011 This fell to $61.9 billion in 2013 In addition to sanctions, mismanagement during the Ahmadi-Nejad ( ) caused a fall in production 5

Iran Sanctions Developments II No Deal Scenarios Current talks likely to break down entirely in late November 2014 Continue for sake of appearances if no deal reached In this case Obama administration would have to yield to Congressional pressures for additional measures Efforts would be made to persuade Iranian’s remaining customers to continue reducing imports Oil Market Conditions Oil markets are easing with slow world growth and expanding US production Gives US more chance of enforcing stricter sanctions In event of Russian crises deepening or other event causing sharp rise in oil prices, sanction on Iran oil exports might crumble 6

Iran Sanctions: Longer Term Effects Eroding Sanctions: In longer Term China in particular would probably seek loopholes to sanctions regime while Iran would explore deals elsewhere China could resort to more barter trade, a dedicated oil bank and using domestic refiners not dependent on international transactions India has already made some progress in arranging alternative tankers and insurance There has been repeated talk of an arrangement with Russia, although logistics are difficult Turkey is likely to continue its gas purchases, given its need for alternatives to Russian supply If sanctions erode slowly, Iran’s oil production capacity would continue a gradual decline, although lower production would ease the strain on its fields 7

Iran Sanctions: Assessment Macroeconomic Implications Competent management of economy could cushion the worst from the new sanctions Assessment With no agreement on Iran’s nuclear program US and EU sanctions will be intensified Would reduce Iranian oil exports further in short term, damaging the Iranian economy Over the rest of the decade sanctions would gradually erode However lack of investment would cause permanent damage to Iran’s production and export capacity 8