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Iran Loses Nuclear Leverage as World Ignores Export Drop

Photographer: Atta Kenare/AFP via Getty Images

Iran’s President Hassan Rouhani, who took office in August, campaigned on a promise to improve Iran’s economy and has expressed a willingness to address international concerns about his country’s nuclear program and seek to end sanctions within a year. Close

Iran’s President Hassan Rouhani, who took office in August, campaigned on a promise to... Read More

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Photographer: Atta Kenare/AFP via Getty Images

Iran’s President Hassan Rouhani, who took office in August, campaigned on a promise to improve Iran’s economy and has expressed a willingness to address international concerns about his country’s nuclear program and seek to end sanctions within a year.

Iran’s new government enters nuclear negotiations today with limited economic leverage, seeking relief from oil sanctions that have squeezed as much as $5 billion a month from its revenues as the world has found other suppliers.

Since the U.S. and the European Union imposed sanctions on Iran’s oil sales in July 2012 as punishment for illicit nuclear work, higher production in the U.S., Saudi Arabia and Iraq has offset the loss of more than 1 million barrels a day in Iranian exports. As U.S. consumers pay $3.23 a gallon for gasoline, almost a dime less than when sanctions took effect, Iran’s economy will contract 1.5 percent this year after shrinking 1.9 percent in 2012, according to International Monetary Fund estimates.

“Right now, Iran needs to sell its oil far more than the rest of the world needs to buy it,” Trevor Houser, a partner at the Rhodium Group LLC, a New York-based economic research firm, said in an interview. “If sanctions were suddenly lifted, I could see a sharp drop in global oil prices, but I think it’s highly unlikely that we’re going to see sanctions removed that quickly. Sanctions are much harder to remove than to enact.”

‘Serious Phase’

As talks resumed today in Geneva between Iran and six world powers -- the U.S., the U.K., France, Germany, China and Russia -- both sides said a deal was within reach. After a decade of on-off negotiations, EU spokesman Michael Mann said today talks with Iran’s new government had entered a “serious phase” and sanctions may be modified when Iran makes concrete changes to its atomic work.

Even in a strained economic environment, Iran’s leaders and many of its people oppose abandoning nuclear development altogether. While 85 percent of Iranians say international sanctions have damaged their livelihoods, and half say they’ve been hurt a great deal, more than two-thirds support their country’s development of nuclear power, according to a Gallup Inc. poll released yesterday.

Iran says its atomic program is for civilian energy and medical use, and it insists it has a right to enrich uranium for peaceful purposes. The U.S. and its allies say Iran is covertly seeking a nuclear-weapons capability.

Iran’s President Hassan Rouhani, who took office in August, campaigned on a pledge to improve his country’s battered economy and his government has set a one-year goal to address international concerns about Iran’s nuclear program and win relief from sanctions.

‘Sanctions Relief’

“Iran’s primary goal in these talks is to get sanctions relief and to get it soon” and not in a “temporary way,” said Suzanne Maloney, an Iran analyst at the Brookings Institution in Washington. “The question is whether or not Iran can or will accept the price that we are willing to pay.”

The U.S. is ready to offer limited, targeted relief from sanctions in return for Iran suspending elements of its nuclear work, a senior U.S. official at the talks said, asking not to be identified because negotiations are confidential. The U.S. is seeking a first step toward a comprehensive accord and would initially leave major curbs on Iran’s trade in place, the official said.

Previously, Iran’s leaders have refused to make nuclear concessions, dismissing sanctions as a temporary inconvenience in a world dependent on Iranian oil. That’s a tougher case to make today.

Revenue Decline

Iran has dropped to sixth place from second among producers in the Organization of Petroleum Exporting Countries. Oil revenue -- the main source of Iranian government funds -- fell to $69 billion in 2012 from $95 billion a year earlier, according to the U.S. Energy Information Administration.

U.S. production, driven by a boom in shale oil, has increased by 1.8 million barrels a day since sanctions went into force, EIA data show. That more than makes up for the fact that Iran is pumping 565,000 fewer barrels, according to a Bloomberg survey of oil companies, producers and analysts. A drop in America’s reliance on imports means tankers from the Middle East and West Africa can instead head to Asia, replacing Iranian crude.

“The factors allowing global oil markets to adjust to taking 1 million barrels per day of Iranian oil off the market include production increases in the U.S., Saudi Arabia and Iraq,” Amos Hochstein, U.S. deputy assistant secretary of state for energy diplomacy, said in an interview. “Additionally, demand has remained flat in the EU and slowed in China and India.”

Market Share

Before the U.S. and EU sanctions, Iran sold oil to 23 nations. Today, only six buyers remain -- China, India, South Korea, Japan, Turkey and Taiwan. To avoid U.S. sanctions that would cut off access to the American banking system, each must prove it has made additional significant reductions in its imports every six months.

Iran has lost market share that it’s not likely to reclaim easily “because the world economy moves on,” said Ray Takeyh, a fellow at the New York-based Council on Foreign Relations and former senior adviser on Iran under Secretary of State Hillary Clinton.

Iran’s push to restore its supplies may be met with ambivalence from its OPEC colleagues, which need oil revenue to pay for domestic programs to stave off unrest that has roiled Egypt, Libya, Algeria and Syria, said Michael Lynch, president of Strategic Energy & Economic Research in Winchester, Massachusetts. A flood of Iranian crude into the market could depress prices and force OPEC to cut production quotas.

Congressional Pressure

On the other hand, steps to ease sanctions would meet opposition in the U.S. from members of Congress who say additional steps to crimp the Iranian economy are needed to persuade Iran to give up ambitions of obtaining nuclear weapons. President Barack Obama’s administration is urging lawmakers to hold off on new sanctions to give negotiations a chance.

“Continuing sanctions or adding more won’t make them capitulate,” said Hooshang Amirahmadi, a professor at Rutgers University in New Jersey and president of the American-Iranian Council. “On the contrary, more sanctions will pave the way either to a military attack or a nuclear-armed Iran.”

To contact the reporters on this story: Indira A.R. Lakshmanan in Geneva at ilakshmanan@bloomberg.net; Asjylyn Loder in New York at aloder@bloomberg.net

To contact the editor responsible for this story: John Walcott at jwalcott9@bloomberg.net

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