Two of the biggest news stories of 2015 have been the fall in global oil prices and the apparent breakthrough in negotiations between Iran, the United States, and others around Iran's nuclear weapons research. And because Iran relies so heavily on oil exports to earn income, the two stories are deeply interlinked.
On the one hand, the decline in the world oil price has made life harder for Iran. On the other hand, relaxing the sanctions against Iran could drive down global oil prices even further — a boon to most of the world's economies, including those of most of the countries pressuring Iran to disarm.
Iran's oil production has been declining but could come back
In terms of oil sitting in the ground, Iran is a whale, with almost 10 percent of the world's proven reserves. But in terms of actual oil production, the country has become more of a minnow. That reflects the multifaceted impact of international sanctions on the Iranian industry. Most of all, the financial sanctions have made it extremely difficult for Iran to attract the foreign investment needed to actually pump the oil out of the ground.
More recently, other sanctions on Iranian shipping and direct bans on the importation of Iranian crude oil have further squeezed the industry. In January, Iran's oil minister told a local newspaper that exports had fallen 60 percent since their peak in 2011 to about 1 million barrels per day.
If sanctions were lifted, this trend would turn around as new investment poured into the Iranian industry. Of course, it would take some time for investment to lead to production, and most likely any deal would only provide partial sanctions relief. But the reality that this shadow production could come back online is hanging over global oil markets.
Iran has 37 million barrels of oil in storage ready for immediate export
Beyond oil sitting untapped in Iranian soils, there is a surprisingly large quantity of oil that has been pumped and is simply sitting around in storage containers. As Anjli Raval of the Financial Times reported earlier this month, the main cause is a quiet diplomatic triumph of the Obama administration: "Ahead of Barack Obama’s visit to New Delhi in January, the Indian government asked domestic refiners to slash purchases of Iranian oil and keep imports in line with the previous fiscal year’s levels." This means oil the Iranians have been pumping for the Indian market has been cooling its heels in storage instead.
Back in late 2014, India was importing 348,000 barrels of Iranian oil per day, which it is allowed to do under the current international sanctions regime. That has fallen to around 50,000 barrels per day as a favor to the anti-Iranian coalition — a favor that is likely tolerable for India because the global trend toward cheap oil makes Iranian imports less desirable.
This and other export curbs mean that for a while now, Iranian exports have actually dropped even more rapidly than Iranian production. The country has responded by investing massively in oil storage. Raval, citing data from the British tanker company Gibson's, says Iran has about 37 million barrels in storage. Unlike oil that's sitting in the ground, oil stored in tankers really could explode onto world markets very quickly in the wake of any kind of diplomatic sentiment. Even if formal sanctions were released only gradually, for example, it is very unlikely that India and other countries would keep up informal deals to swear off Iranian crude.
More Iranian oil on the market would be great for the US economy
Negotiations with Iran are being undertaken with an overwhelming emphasis on foreign policy and national security issues. But it is worth mentioning that getting Iranian oil back onto world markets and driving down prices would be excellent news for the American economy.
And it would be even better news for the economies of other key participants in the negotiations — especially Germany and China — that lack America's domestic oil industry.
Conversely, Russia, which has traditionally been one of the countries that is friendliest to Iran, would suffer further economic harm from an influx of Iranian oil. And the Persian Gulf states — led by Saudi Arabia — have generally taken a strong anti-Iranian line in geopolitics and have a strong economic interest in keeping Iranian oil off the market.