What an Iranian Olive Branch Could Mean for Oil

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Iranian President Hasan Rouhani
Ebrahim Noroozi/APIran President Hasan Rouhani
By Yousef Gamal El-Din

As President Barack Obama and new Iranian President Hasan Rouhani converge on the United Nations on Tuesday, energy market watchers are asking whether recent conciliatory gestures from Iran are genuine -- and what they could mean for global oil.

Experts who spoke with CNBC said that Iran's efforts at some sort of rapprochement appear to be real, and for two very practical reasons: It's being economically strangled more than ever by coordinated, international sanctions, and it's staring at a credible U.S. threat of force over its nuclear program.

A new administration in Iran gives the country the opportunity to reassess its foreign policy, and in effect acknowledge that its attempts to counter sanctions have largely failed.

Rouhani wrote in an op-ed last week that world leaders "are expected to lead in turning threats into opportunities."

Iran depends not only on oil revenue to sustain the political status quo, but also on foreign investment to maintain the domestic oil industry itself. Billions of dollars in foreign investment are required for the country's exploration and development efforts.

"These heavy costs have been an important motivation for Iran to seek a settlement to its nuclear dispute with the West," Nader Habibi, Henry J. Leir professor of the economics of the Middle East at Brandeis University, told CNBC.

In the past, Iran could significantly mitigate the effects of sanctions by realigning its trade and relations from the West to Asia. Once the sanctions became more multilateral in 2012, however, they began to choke the Iranian economy. Some experts have drawn parallels between Iran's current conundrum and the coordinated sanctions that helped dismantle South Africa's apartheid system in the early 1990s.

"We don't know what has motivated the seeming change of attitude, and don't know if that also represents a change of policy," Jeffrey Schott, senior fellow at the Peterson Institute for International Economics, told CNBC. "What we do know is that sanctions have contributed to a sharp decline in the volume of Iranian oil exports, exacerbating Iran's fiscal difficulties."

Effect On Global Energy Markets

Sanctions have removed a considerable flow of crude oil from global supply. The last time Iran filed data with the Joint Organizations Data Initiative, a global database that tracks oil markets was in May 2012. At that time, Iranian exports amounted to 1.88 million barrels a day, already the lowest level in 11 years. An even more somber assessment came from the U.S. Energy Information Administration earlier this year, which estimated Iranian exports of crude and lease condensate fell to some 1.5 million barrels a day in 2012, compared with 2.5 million barrels a day in 2011.

But the possibility of reconciliation between the United States and Iran is more than just a 1 million bpd question for global oil markets. Tangible U.S.-Iranian rapprochement would also reduce the geopolitical risk premium, long dominated by the prospect of a pre-emptive strike on suspected nuclear facilities and the threat, however remote, of a closure of the Strait of Hormuz.

"Anything that reduces the tensions will certainly help oil prices move lower. We've already have the Syrian premium coming out of the market," said Addison Armstrong of Tradition Energy. He added that the return of some Libyan oil is also weighing on prices.

"The Iran premium I've got to believe that it's somewhere around $10 a barrel," he said.

Others dispute the idea of a risk premium hanging over markets. Trevor Houser, partner with Rhodium Group, said the signs of a thaw in relationships are not enough to move the price of oil much.

"I wouldn't expect much of a drop in the price of oil just because of the diplomatic outcome. The Iran premium that's in the price right now has been the actual reduction in supply," he said. "It will take an act of Congress to remove the sanctions."

Congress voted for the sanctions, toughening some even beyond what was sought by the Obama administration.

Easier Said Than Done

And then there's the political reality that a genuine easing of U.S.-Iranian tensions faces serious obstacles.

This would not be the first time U.S.-Iranian tensions have cooled somewhat, only to heat back up. First formal sanctions against Iran were adopted by President Jimmy Carter in 1980. Following more sanctions in response to state-sponsored terrorism and Iran's alleged pursuit of weapons of mass destruction in the 1990s, reformist president Mohammed Khatami was able to persuade the U.S. to scale back restrictions. But relations deteriorated again, most vividly when President George W. Bush added Iran to his "Axis of Evil" in 2002.

Despite the possible benefits of an improved relationship, powerful political and religious interests within Iran still see direct dialogue with the United States as unacceptable. Abandoning or curtailing its nuclear program, a national goal pursued since the 1980s, would not be well received among more conservative Iranian factions.

"There is always a risk that hardliners try to derail the negotiations, but the probability of such an attempt at present is small ... because even the hardliners are aware that the continuation, and possible escalation of sanctions, is very costly," Habibi said.

Iran is running out of time. A rational analysis would suggest that these political gestures are real, as they serve a mutual interest. However, logic and reason are a bold assumption in international political affairs.

-CNBC Executive News Editor Patti Domm contributed to this report.


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nthereoff

Does Iran want peace with the U S or a piece of U S? Be carefull what you wish for . More oil should be drill here and more fracking for natural gas allowed. If the Mid East produces more oil. Great

September 25 2013 at 10:59 AM Report abuse rate up rate down Reply
setanta54s_back

why CAN'T the USA drill a hOLE intO the ground,insert a freekin pipe ,GET THE OIL AND REFINE IT ?

WHY CAN'T THE USA OPEN THE CAPPED WELLS which are ooooooooozing crude into the pacific ocean ?


WHY CAN'T THE USA DRILL IN PROVEN AREAS ?

AND TELL IRAN to stick that branch where the sun does not shine and eat sand ?

uuuuuuuuuh professUHs out here,why is this continuing ?
and dont dare say it is the bIg baaaaaaad oil BLOCKING THIS EITHER.

September 25 2013 at 1:01 AM Report abuse rate up rate down Reply
vrosen

it took the U S 3 years in the 1940's to build a nuclear weapon. the iranians have been working on it since the 1980's. even N korea figured it out. iran must really be lacking in credible scientists.

September 24 2013 at 1:09 PM Report abuse rate up rate down Reply
hugh_geenormous

Wait until they get their nuke.

Didn't hugobama say Iran is a tiny country...no real threat?

September 24 2013 at 12:07 PM Report abuse rate up rate down Reply
red8cr

crediable threat of force ..........please these two bimbos would ask Russia if that wold be acceptable

September 24 2013 at 11:58 AM Report abuse rate up rate down Reply