A slow thaw in frozen US-Iran relations has led to booming oil exports

The deep freeze that has been US-Iran relations is slowly thawing. That doesn’t mean relations will become “good” anytime soon. But it does mean that Iran will be able to slowly reintegrate into the global economy. 

To an extent, Washington has been forced to ease sanctions on Iran to boost oil supplies to the global market and pull prices down that are being pumped up by the OPEC+ cartel and as part of the US efforts to limit Russia’s income.

Oil has historically played a pivotal role in the economy of Iran, known as the world’s third-largest oil and second-largest natural gas reserves holder. The oil and gas industry has been the engine of economic growth for the country, directly affecting public development projects, the government's fiscal budget, and most foreign exchange sources.

For exactly the same reasons, strategically targeted sanctions wreaked havoc on the Iranian economy in the 2010s.

After the US and the European Union imposed an oil embargo on Iran in 2012 for its nuclear program, production went from 3.70mn barrels per day to 2.74mn bpd in the following year – a 25% drop.

However, it began to recover in 2015, following the signing of the nuclear deal known as the Joint Comprehensive Plan of Action (JCPOA). Production reached its highest level since the 1979 Islamic Revolution in 2017, at 3.92mn bpd. But then again after the US withdrew from the JCPOA in 2018 and reimposed sanctions, the output declined significantly. (chart)

It reached a low of 2.2mn bpd in 2020.

Now oil output has conspicuously recovered, despite the sanctions remaining in place, as Mohsen Khojastemehr, the CEO of the National Iranian Oil Company (NIOC), said recently. It has now reached approximately 3.5mn bpd.

The country seems to be re-joining the fold of major global oil producers. Official data showed Iran regained its position as OPEC’s third-largest crude oil producer in August with 3mn bpd, witnessing the highest increase among member states compared to July.

Besides increase in production, the rise of Iran to third place was also influenced by Saudi Arabia's deliberate reduction of 1mn bpd until the end of 2023, coupled with Russia, which is the OPEC+ group's second-largest producer, prolonging its 300,000 bpd voluntary production cut for the same duration.

Exports on the rise as sanctions loosen

Iran is reaching out to fellow BRICS+ member China for business as intra-BRICS trade flourishes. China is buying around 80% of Iran’s oil shipments, which have hit a five-year high in recent months. Iran's oil export figures are not publicly available, as the Iranian government does not release official data. Yet according to data from shipping companies and other third parties, crude exports exceeded 1.5mn bpd in May, the highest monthly rate since 2018.

The US has not imposed any new sanctions on Iran's oil sector in recent months, and it has not enforced existing sanctions as strictly as it did in the past.

Washington has signalled that it is willing to lift sanctions on Iran if Tehran returns to compliance with the JCPOA. The nuclear talks have been ongoing for several months, but they have not yet resulted in a breakthrough.

As the BRICS relations grow, Washington is hoping to drive a wedge in between Tehran’s increasingly warm relations with Beijing and Moscow, and as Iran is as interested in having sanctions lifted as it is in trading with its new friends, that strategy might bear some fruit, which is driving the glacial progress in a possible détente.

The war in Ukraine has also had an impact on US sanctions policy. The US and its allies have imposed severe sanctions on Russia in response to its invasion of Ukraine. These sanctions have led to a sharp rise in global energy prices and the US is seen as reluctant to impose further sanctions on Iran that would reduce supplies of oil further and push prices up further. To an extent, Washington has been forced to ease oil sanctions on Iran as one of the few mechanisms at its disposal for increasing supplies to the international oil market.

Reports say Brent crude oil and West Texas Intermediate crude oil are both trading above $90 per barrel, as investors prepare for the upcoming OPEC+ meeting and monitor the war in Ukraine.

Oil’s dominance in the economy

The US Energy Information Administration (EIA) estimated that Iran earned $54bn from its oil exports in 2022, up from $25.5bn in 2021 and $7.9bn in 2020.

The EIA also estimated that Iran earned $19bn from its oil exports in the first five months of 2023. Considering Tehran’s success in boosting its crude output and exports in recent months, the country seems to be on track to earn even more from its crude exports in 2023.

But except oil, other commodities in Iran’s export basket lack significant weight. Crude oil and refined products constitute the lion’s share of exports from the country. The non-oil export basket mainly includes petrochemical products besides metals and agricultural products.

The dominance of oil in the economy is also evident in Iran’s GDP.

Recent data from the Central Bank of Iran (CBI) show as Iran's economy experienced a notable growth rate of 6.2% in spring (March 21-June 21), this remarkable quarterly expansion – the highest in the past two years – is primarily attributed to the recent political changes, the significant increase in production and exports of oil as well as natural gas and gas condensate.

Notably, the oil sector achieved an impressive growth rate of 16.4% year on year during the period, about five times more than what it registered in last year’s spring (1.9%). The overall GDP growth witnessed about a three-fold y/y rise.

Dutch disease

The predominance of oil in the Iranian economy has also meant underdevelopment in other sectors – what is known as the Dutch Disease.

“Symptoms of the Dutch disease re-emerged in Iran’s economy in 1984-85 when oil exports jumped to $50bn. Yet again, between 2002 and 2012, the country fell for oil revenues hook, line and sinker. And the last time windfall gains of natural resources misled an Iranian government was after the JCPOA,” Iranian economist Saeed Laylaz said in an interview with the government-owned Iran newspaper.

“…and that is not just exclusive to Iran. Russia, Saudi Arabia and Norway have also suffered from bouts of the Dutch Disease. Governments are quick to fall into disorder as soon as they get flushed with natural resource money,” Leylaz noted, adding that in 1974-75, as Iran’s foreign revenues increased, the then government revised its long-term development plans under the illusion that oil income would keep flowing in.

“Petrodollars in effect wreaked havoc on all political and social structures of the country. Economically, massive inflation hit the country, creating an inequality substantial enough to lead to a national breakdown. The Islamic Revolution saved Iran’s economy, as there was no recovery within the rigged old system,” he said.

It seems that oil is once again bringing respite to Iran’s economy as the country is finding its way through selling more of the commodity with mixed blessing. Meanwhile, enhanced diplomacy has seen the recent releases of sizable sums in previously frozen funds due to sanctions. How the money will be spent is a question that will play a significant role in shaping the economic landscape of Iran, 45 years after the Islamic Revolution promised to equitably benefit society from the nation's abundant resources.