Iran is an important player in the world energy market, both for its large amount of proven oil and natural gas reserves and for its significant energy consumption. However, international sanctions have crippled Iran’s energy production in recent years. Even if ongoing negotiations between Iran and the P5+1 powers result in a deal that lifts the sanctions, it could still be some time before Iran is able to fully resume its previous levels of oil production and exportation.
Iran boasts the fourth-largest crude oil reserves and the second-largest liquefied natural gas reserves in the world. However, its production has significantly decreased over the past few years with the implementation of U.S.-led sanctions against Iran for its illicit nuclear program. It is also one of the largest oil-consuming countries in the Middle East, second only to Saudi Arabia. Iran’s major trading partners in crude oil are China, India, Japan, South Korea and Turkey.
In 2012, Iran’s share of the global oil market dropped from 2.5 million barrels per day to 1 million barrels per day as a result of the sanctions, which targeted Iranian shipping, insurance, ports, banking and oil trade. If the framework agreement reached in early 2015 is finalized into a formal deal, it could enable Iran to eventually regain some of its lost market share. However, it is unclear how quickly and to what degree Iran would be able to ramp its production back up.1
Many worry that Iran could obstruct the global flow of oil by blocking maritime transit through the Strait of Hormuz. The strait, a narrow chokepoint that connects the Persian Gulf to the Gulf of Oman, is the only viable maritime pathway for products coming from the Indian Ocean. As such, it is geostrategically important not only to the United States, but also to all consumers and producers of crude oil products. Regional fears that Iran may one day choose to block the strait have led some countries, including Saudi Arabia and the UAE, to build pipelines bypassing the strait.
Iran’s nuclear program has also triggered international concern in recent years. Some believe the U.S. Shale Revolution has given the West the ability to continue using sanctions to pressure Iran into making concessions on its nuclear program. The added supply of U.S. shale oil has more than made up for the reduction of Iranian oil on the market, lowering global oil prices and preventing persistent sanctions from severely affecting global energy markets.2
If Iran is able to get sanctions lifted by signing a deal on its nuclear program, it will work to resume its oil production and exports, a much-needed source of revenue for its struggling economy. However, because new technologies such as fracking and deepwater drilling have led to an influx of energy supplies on the global market, driving oil and gas prices down, Iran may not be able to accrue as much money for its oil as it has in the past — especially since the addition of its own oil supplies would likely drive global prices down even further. With fewer revenues, it is possible Iran would have less money to allocate toward its nuclear program, an important concern for U.S. security.