Iran Trades Nuclear Capacity For Economic Freedom

Source: http://www.flickr.com/photos/ollesvensson/

Source: http://www.flickr.com/photos/ollesvensson/

President Barack Obama announced on Saturday that an initial, temporary accord had been reached with Iran regarding its nuclear program. The agreement, reached between the P5+1 (the United States, United Kingdom, Germany, France, Russia, and China, coordinated by the European Union) and Iran would curb tough oil, banking, and financial sanctions levied against the nation in exchange for a wind-down of and increased transparency into its nuclear operations.

The deal is a landmark. For the Obama administration, it is a much-needed success and could pave the way for a fully functional diplomatic relationship with the estranged Islamic state. For Iran’s recently elected president, Hassan Rouhani, who took office in August, it’s an early manifestation of his campaign promises to restore the nation’s economy and repair relations with the international community.

According to a White House fact sheet, the sanctions imposed against Iran have all but crippled the nation’s economy. Once the second largest oil producer in the Organization of Oil Producing Countries, Iran has fallen to sixth place in a list of 12 as its crude oil production fell from nearly 4.2 million barrels per day to 2.6 million bpd in October. Crude oils sales fell from 2.5 million bpd to about 1 million bpd after the implementation of the sanctions beginning in 2012.

According to the International Energy Agency, which will be conducting daily compliance inspections at Iranian nuclear facilities, total imports of Iranian crude oil averaged about 1.1 million bpd in the first three quarters of 2013 but fell as low as 715,000 bpd in October. The only major post-sanction importers of Iranian oil are China, India, South Korea, Japan, Turkey, and Taiwan.

The White House calculates that Iran is losing out on $5 billion in revenue each month from lost oil sales alone. The “vast majority” of approximately $100 billion in foreign exchange holdings has been frozen due to the sanctions, and the temporary relaxing of sanctions will unfreeze only about $4.2 billion of these holdings.

It’s important to point out that while the agreement does not allow Iran’s oil sales to increase directly, the relaxing of certain conditions will increase real oil sales. Financial sanctions made it impossible for tankers carrying Iran’s crude oil to be insured, which in turn made it effectively impossible to transport. As some of these financial sanctions are relaxed, actual shipments of crude oil are expected to increase to the full volume allowed under the sanctions.

The announcement of the deal had an immediate impact on markets around the world. Unsurprisingly, the price of oil fell as some of the risk premium evaporated. On Monday morning, Brent crude was off 1.65 percent at $109.22 per barrel, while WTI crude was off 1.36 percent at $93.55 per barrel.

“For the first time in nearly a decade, we have halted the progress of the Iranian nuclear program, and key parts of the program will be rolled back,” said Obama on Saturday evening, shortly after the deal was reached. “Iran has committed to halting certain levels of enrichment and neutralizing part of its stockpiles. Iran cannot use its next-generation centrifuges, which are used for enriching uranium. Iran cannot install or start up new centrifuges, and its production of centrifuges will be limited. Iran will halt work at its plutonium reactor. And new inspections will provide extensive access to Iran’s nuclear facilities and allow the international community to verify whether Iran is keeping its commitments.”

The deal will be in place for six months, and the P5+1 hopes that it will establish a framework from which a longer-term agreement can be made. Rouhani, who has long been involved in international negotiations regarding Iran’s nuclear program, has so far made good on his intentions to play nice with the international community. What remains to be seen, though, is if Iran’s supreme leader, Ali Khamenei, is willing to take the option to develop a nuclear weapon totally off the table.

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