As Iran mourns, questions about its oil remain

The next president will have to deal with economic woes and rumblings from Washington

May 22, 2024

People in Tehran walk past a billboard paying tribute to President Ebrahim Raisi, who died in a helicopter crash last weekend

Iran has been rocked by the death of Ebrahim Raisi, its president and a contender to succeed Ali Khamenei as the country’s rahbar or supreme leader.

In the clerical hierarchy and the security establishment, there will be much jostling for position and this may be protracted. Any candidate to become “supreme leader in waiting” – as opposed to president – will need religious credentials.

There is, though, another factor to consider when it comes to Iran: oil and the outlook in Washington.

Iran is producing 3.3 million barrels of oil per day, according to the International Energy Agency. Tanker tracker companies report that exports stand at 1.5 million-1.6 million bpd.

Newsletter
Get the Best of AGBI delivered straight to your inbox every week

Iran’s oil earnings from exports were almost $36 billion in the 12 months to March 2024, according to the Iranian Labour News Agency, citing the country’s head of customs.

This is surprising because it is in contravention of US and other sanctions. Why the Biden administration has allowed this state of affairs to develop, particularly when Iran has been in effect at war with Israel and Tehran’s allies attack American soldiers, can seem mysterious.

At first it appeared to be because President Joe Biden’s team was wedded to one of the perceived successes of the Obama administration, in which many of its members had served – the Iran nuclear deal formally known as the Joint Comprehensive Plan of Action (JCPOA).

This brought Iran’s nuclear programme under international scrutiny and limited enrichment of uranium. In return, Iran was allowed to access frozen bank accounts, imports were eased and oil exports resumed.

However, the Iranians, master negotiators that they are, managed to have missiles excluded from the JCPOA, judging that US officials were desperate for a successful outcome to years of talks.

Come 2018, however, Donald Trump took a different view. His administration instituted a campaign of “maximum pressure” on Tehran.

Reams of sanctions were unveiled against individuals, companies and institutions – and the results were dramatic. Oil production fell to an estimated 1 million barrels a day, meaning limited-to-zero exports, and foreign exchange reserves plummeted.

Six years on from Trump’s abrupt withdrawal from the JCPOA, Iran’s position is stronger. Tehran has growing ties with Russia and China, the latter being the main export market for Iranian crude.

Crowds gather in Tehran for the funeral of President Ebrahim Raisi

Officially declared foreign exchange reserves have recovered – senior politicians and officers in the Iranian Revolutionary Guard Corps having taken their cut. Last October the IMF projected that Iran’s forex reserves would reach $24.3 billion this year, up from $21.1 billion in 2023. This is not huge for an economy the size of Iran, but it is significant.

The Islamic republic is nonetheless vulnerable. Inflation stands at 40 percent, water is increasingly scarce as the country pursues a policy of maximal food security and Tehran may become a net gas importer thanks to huge energy subsidies.

Iran made itself an expert in missile technology, but has notably failed to develop its offshore liquefied natural gas potential. Compare and contrast with Qatar, with which it shares the South Pars field.

The Iranians have become adept at circumventing sanctions, however, turning off transponders on tankers and deploying their shipping fleet around the world as a floating tank farm.

Phase 11 of the South Pars gas field opened last August. Iran has lagged behind Qatar in developing its LNG potential

In Washington, the Biden administration has been an enthusiastic imposer of sanctions but has backed off in implementation and policing – and the reasons for this have become more apparent.

It is an election year and gasoline is a major component of the consumer price basket. Inflation remains high and the Federal Reserve has held back in easing interest rates.

A poll published last week by the Financial Times found that 80 percent of Americans see persistently high prices as a major concern. With Biden’s approval ratings languishing, it is little surprise that his team does not want those 1.5 million Iranian barrels taken off world oil supply.

Opec+ is grappling with oil production cuts imposed until June, which is also when the International Atomic Energy Agency’s board of governors will meet in Vienna and we can expect an update on Iran’s nuclear programme.

If Trump wins again in November – though it’s unwise to set too much store by the polls before Labor Day on September 2 – we are likely to see the return of “maximum pressure” in early 2025.

It may be then that oil traders see those 1.5 million barrels disappear and Iran’s still-new president and clerical establishment lose an important source of nourishment.

James Drummond is Editor-in-Chief of AGBI