Lifting Iranian Sanctions Expected to Lower Oil Prices

By William Moore,
International Business Writer

The New York Times reported on Monday that oil prices fell below $30 as sanctions that have been placed on Iran by many Western countries, primarily the United States, were finally lifted. This drop marks some of the lowest oil prices that the market has seen in multiple decades. The reason for the historically low price is the manifestation of global economics in action.

The Oil Producing and Exporting Countries (OPEC) organization has been flooding international markets with oil in recent years in an attempt to drive Western companies that have recently started producing natural gas in direct competition out of business. To this end, OPEC has been keeping the market oversupplied with roughly 100,000 barrels of oil per day – enough to meet the demand of a state the size of Pennsylvania or Ohio.  While fulfilling its goal, however, OPEC has been attempting to keep oil prices as high as possible while still keeping them at a level below the minimum that Western companies would need to stay profitable.  Iran’s plans to increase oil production in the coming months could cause yet another plunge in oil prices, much to the frustration of several OPEC member nations.  Saudi Arabia in particular, a long time geopolitical rival of Iran, has attempted to increase sales in European countries in an attempt to minimize the impact that Iran’s increased sales will have.

Despite Saudi Arabia’s efforts Iran still plans to increase oil sales, potentially causing prices to sink even further. Iran’s Deputy Oil Minister recently stated that in the coming months they plan to increase production by as much as 500,000 barrels per day, with plans to eventually increase production by up to 2.5 million barrels as the BBC reports. Despite these claims oil industry analysts remain skeptical. Following the implementation of the economic sanctions imposed by Western countries, many of Iran’s oil production equipment and facilities fell into disrepair. Updating repairing and bringing these facilities back online could take a long time – even years as the New York Times reports. For this reason, many analysts believe that strong production quotas stated by the current regime are simply an attempt to reassure the Iranian public that now that sanctions have been lifted, economic relief is on the way. One former Saudi Arabian oil executive, Sadad Ibrahim Al-Husseini, stated that he expected Iranian oil production would be able to meet no more than 300,000 – 400,000 additional barrels of oil per day in the short term.

Oil industry analysts believe that oil prices will remain incredibly low throughout 2016, possibly dropping even lower as Iranian oil production takes off.  This could lead to huge savings for Western consumers in the coming months.

In the meantime, relief for the Iranian people could still be far off. As the Guardian reports, a number of key economic sanctions enacted by the United States still remain in place. These sanctions, designed by the United States to help fight terrorism, have effectively put a prohibition on US companies making deals with Iranian ones. This has greatly limited the economic recovery that Iran can expect to see in the coming years until further action is taken to ensure their relief.  In the end, relief for the Iranian people will ultimately depend upon large banks in Western countries being willing to reinvest in Iranian infrastructure in the coming years. Time will tell whether this will occur.

A version of this article appeared in the Tuesday, January 26th print edition.

Contact William at
niskamoore@gmail.com

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