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In oil-rich Iran, new sanctions imperil bright future

Iran is making about US$50 billion a year selling its oil, which it wasn’t able to do for years because of sanctions. So, why is it behaving in ways that puts this economic opportunity in jeopardy?

Iran’s relatively new freedom to sell its plentiful fossil fuels means a bright future – a future of improved infrastructure and upgraded education, perhaps, or modernized civil services – is within its grasp.

The threat of sanctions against the country, though, means that bright future is in danger of dimming.

Gas flares from an oil production platform at the Soroush oil fields in the Persian Gulf, south of the capital Tehran, July 25, 2005. REUTERS/Raheb Homavandi

Oil-rich and ostracized

To understand Iran’s newly precarious position, it’s important to first know this: Iran has lots of and lots of oil and gas. For example, The South Pars/North Dome Gas-Condensate Field in the Persian Gulf, which it shares with Qatar, is thought to be the largest natural gas field in the world.

Iran, however, has not always been able to sell that oil and gas.

The United States imposed sanctions on the country following the seizure of its Tehran embassy during the Iranian Revolution of 1979 and the United Nations imposed its own set of sanctions on the country in 2006 after it failed to limit its uranium enrichment program to civilian, rather than military, use. Both sets of sanctions have included severe restrictions on economic activity with Iran, especially when it comes to investment in and purchase of petrochemicals and energy materials.

Those UN sanctions were lifted in January 2016 after Iran agreed to curb its nuclear program. With that easement came an opportunity for economic growth the country has not seen in almost five decades.

A general view of the Damavand summit northeast of Tehran, Iran, May 19, 2006. REUTERS/Morteza Nikoubazl

A new boom period

Since the UN sanctions were lifted, Iran has increased its crude production by over 1 million barrels per day (bpd), our Oil Research has found. Its January 2018 output was 3.82 million bpd. It has had crude oil exports of over 2 million bpd for the past two years, meaning its exports have more than doubled.

All this activity in the energy sector has been good for Iran’s coffers. In 2017, it made about US$50 billion from its oil. That figure could reach $60 billion this year.

With numbers like that, it’s hard to imagine why Iran would want to put its blossoming energy sector in jeopardy.

Nevertheless, that is exactly what it has done.

Questionable international activity

While many (but not all) members of the international community believe Iran has largely hewed close to its 2016 promises, new concerns about its alleged meddling in Yemen and Syria have stoked conversation around new sanctions.

The economic boost of increased oil activity hasn’t trickled down to its general population, either. That has engendered unrest among its citizens and a simmering resentment for the oil sector and the select few who seem to be profiting from it.

A view of Tehran’s telecommunications tower (C, top), which is currently under construction, in north-western Tehran April 9, 2007. REUTERS/Morteza Nikoubazl (IRAN)

What’s next for Iran?

What Iran’s path to the future looks like depends on several factors.

First, the global price of oil needs to remain strong and Iran must continue investing in its own capabilities (in 2016, it estimated it needed to invest some US$200 billion into its own infrastructure in order to reclaim its position among the world’s key energy-supplying countries.)

WATCH: Refinitiv Perspectives Livestream – Oil Pricing: Which way will it go? 

Second, a lot depends on relations between the U.S., which wants to be strict with Iran, and China and Russia, which generally seem to take a more lenient view. China is a key export destination for Iranian oil; Russia has plenty of oil of its own, but seems to relish using Iran as a pawn in its game of one-upmanship with the U.S.

Third – and perhaps most importantly – whether the U.S. and UN impose a new round of sanctions will dramatically affect Iran’s near-term future. Even if China, Russia and the EU don’t participate in the sanctions, they would potentially cripple Iran’s prosperous energy program.

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