Geoeconomic dances around Iran – Pro and Contra

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Renewed discussion of removing sanctions from Iran’s oil industry is becoming one of the most important issues on the current agenda.  The subject reflects a strategy whereby the United States and the EU are looking for solutions to the problem of an oil shortage in the here and now: they are under time pressure given the possibility of a full-scale oil embargo against Russia. 
The enormity of this task is clear from the figures: there is a need to drive at least 4.2 million barrels per day out of the market – that is, Russia’s total daily export minus the volumes it supplies to former Soviet countries – but ideally all 4.7 million barrels.

Meanwhile, it is necessary to understand that America’s own opportunities to increase its oil exports are minimal.  Opportunities to increase extraction in the US are also almost exhausted. This is partly shown by a growth in prices in its domestic market, linked to the rapid exhaustion of cheap and easily accessible deposits. 
A further stimulated growth in output can play a certain role only in easing price peaks in the domestic market, which is currently happening.  This means that weakening Russia’s position in the oil market can only be achieved via foreign policy decisions and actions.

In these circumstances getting Iranian oil to the global market is extremely important, not just as a tool for squeezing out Russian oil (without Iranian oil coming onto the market in at least the pre-sanctions volume of 2.6 million barrels per day, in theory it is impossible to speak of driving Russian oil out of the market), but as a factor in global price stabilization in circumstances where the United States’ Arab allies have adopted a waiting position on increasing supply to the market.
For this reason, a complex geoeconomic game is unfolding around Iran.  On the one hand this facilitates Washington’s dialogue with Tehran but on the other it creates a wider and more complicated context for dialogue, which is not always favourable to the West.

Lifting the oil blockade on Iran is possible from a political point of view. In fact, it will almost certainly happen in one form or another.  The Iranian leadership as a whole is ready for compromise with the United States, especially since it understands the inevitability of a strike from Israel on the country’s nuclear installations should its nuclear programme continue. 
Iran badly needs hard currency earnings to implement an enforced socio-economic modernization, aimed at curtailing the growing risks of development.  As such, it is interested in escaping its isolated state.

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A strategic problem arises with the issue of getting Iranian oil to the global market, namely the need to drive out Russian hydrocarbons – and oil in particular – not altogether, but towards specific markets and within desirable price parameters, which must be relatively high. 
The way in which Iranian oil was exported prior to sanctions (before 2017) had a pronounced geographically localized nature: the majority, over 70%, was sent to countries in East and Southeast Asia, as well as to India.  And as the events of March 2022 have shown, it will hardly be possible to involve these countries fully in the oil embargo against Russia that Washington plans. But it is precisely these markets from which Iranian oil is meant to drive out Russian oil. 
If Iranian oil has prospects for increasing its presence in India, in the Chinese market, for example, Russian oil will have commercial competitive advantages that are only too obvious. 
As far as increasing the presence of Iranian oil in the European market is concerned, it must be acknowledged that this does not entirely fit the plans of the United States, which wants to use the geopolitical situation to its own ends and may try to bring the European energy market fully under its control.

One of the most important issues will be that of transporting additional volumes of oil: for various political and technological reasons it is very unlikely that Iran will be able to use the system of pipelines around the Caspian Sea for the next year and a half. The situation could of course change in the future, but not yet.

There are also restrictions associated with the technological nature of Iranian oil production. It would seem that a proportion of the heavy and light medium-grade Iranian oil produced (20% and around 80%, respectively) is suitable for export, although this somewhat limits the range of commercially profitable petroleum products. The problem, however, is in the low level of recoverability, which was only just over 30% before sanctions were introduced by Donald Trump. This does not only speak to the relatively low effectiveness of Iran’s oil industry:  it demonstrates the impossibility of rapidly increasing production without bringing new fields on stream and making major investments in extraction technology. 
This means that we can expect only a short-term peak in oil production, after which a break for widescale investment in modernization will inevitably be needed. 

Again, however, it is entirely possible that this could very much suit the US.  Washington needs an initial burst of publicity capable of influencing the state of the global market. Important political developments are happening around this. How the market subsequently evolves is a secondary issue for the White House. But apart from these obvious “sectoral” restrictions, there are a whole range of political factors that substantially complicate removing Iran from a state of isolation. Chief of these restrictions is the possibility that the issue of Iran will return to the United States’ domestic political agenda against a background in which the Republicans are growing in strength ahead of the autumn elections to Congress. 
The longer the current bargaining between Washington and Tehran drags on, the more this factor will grow, and it will largely play against a compromise on oil. 

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There are several other factors to be noted:

1.  Existing contracts between Iran and oil importers, above all in Southeast Asia: even if sanctions are fully lifted, the available supply of Iranian oil will be limited by the requirements of existing earlier contracts. These are above all barter contracts since Tehran’s distrust of reciprocal payments in dollars has not just persisted but intensified.   

2.  The political legalization of the Iranian regime in the United States: it is unlikely that Tehran, which fully recognizes the vulnerability of America’s position, will agree to confine agreements with the United States to oil and a nuclear deal alone.  
Iran aims to achieve a major deal with the United States within which it would obviously raise the issue of recognizing Iran’s geopolitical status.  The majority of experts agree that this would be politically suicidal for the current American leadership, at least prior to the elections in the autumn this year.

3.  Even considering the readiness of a significant part of the Iranian elite for compromise, a politically sensitive issue has arisen in recent weeks about the payment mechanism for the oil. It is highly likely that instead of the dollar, or as the EU is hoping the euro, Tehran’s payment tool will be the Chinese yuan.  This will hardly suit Washington, even in the medium term.

4.  The main goals of the Iranian leadership at the current stage are to modernize its armed forces, stabilize the food situation, and modernize the country’s energy system. Iran has only two potential allies in a comprehensive solution of two of these three issues: China, and alas Russia, which it would appear Tehran fully recognizes.   
It will therefore be extremely difficult for the West to pressure Tehran into a new form of deal that excludes Russia.  

5.  The interests of the United States’ Middle Eastern allies – not just Saudi Arabia but the Gulf oil states as a whole, which rightly fear that a deal could be implemented at their expense. We should assume that the intensity of pressure on Washington from this quarter will only grow and that considering the nature of the Arab oil states’ lobbying presence in Washington, this pressure could be highly personal in nature. 

Finally, the main issue and the chief and most immediate task for the US and the EU – despite a substantial difference in the volumes they import from Russia in dollar terms – is around not oil but natural gas. 
It is in precisely this field of gas energy in the European market and beyond that the most acute situation is developing, and agreements with Iran on oil come nowhere close to solving this main issue.  By contrast, they substantially complicate the context of the United States’ actions. 
This is because a compromise with Iran will show others involved in struggles in the energy market that it is possible to extract significant concessions from the US, including political ones.  Thus, one can safely predict that the geoeconomic dances around Iran will drag on.