July 7, 2014

Could More Sanctions Roil Energy Markets?

Could the collapse of Iran nuclear negotiations cause havoc at the gas pump this summer?

While negotiators from the P5+1 and Iran are meeting this week for a final marathon session to see if a comprehensive solution can be reached as to Iran’s nuclear program, a perfect storm could await world energy markets if the talks fail to produce a deal.


On one side, Congress stands prepared to impose new sanctions on Iran should agreement not be reached. Sanctions include a de facto blockade of Iran’s oil exports, which have already been cut to a third from 2010 levels.

Meanwhile, Iraq and Libya – two major oil exporters – remain caught in the midst of civil war, facing near-term disruptions in oil production and long-term political uncertainty. Instability in the Middle East is at a historical high, and the oil markets have responded to this instability by raising the price for a barrel of oil, as the latest US Energy Information Administration report shows.

That is why any move to take Iranian oil further offline could have a major effect on the price at the pump, as energy prices skyrocket amidst this increasingly destabilizing situation. Such an eventuality could heighten the importance of reaching a nuclear deal in the weeks ahead.

As the EIA noted in its latest report last week, continued regional instability in the Middle East and North Africa could have a significant impact on the global economy. Supply disruptions, geopolitical instability, and a decline in surplus production all contributed to price increases in global oil markets over the past two months, with the possibility of more trouble to come.

One obvious factor is the Iraq crisis. The EIA report noted that while most Iraqi oil production has yet to be severely affected by the renewed conflict there, any exacerbation of the fighting could produce significant trouble, most especially “if the crisis moves to the southern Basrah region.” Iraq has accelerated the pace of its oil production over the past few years and experts have long expected Iraq to play a significant role in securing tame oil markets in the future. With the rise of ISIS and the potential break-off of the Kurdish north from Iraq proper, these expectations are now on shaky grounds.

Other major oil exports like Libya, Nigeria, South Sudan, and Yemen are likewise facing significant security challenges that have taken most of their oil supply out of the market. And while other producers – including the United States – are increasing supply to make up for shortfalls elsewhere, it is unlikely to dramatically loosen an increasingly tight oil market.

These troubling events take place against the backdrop of increased global oil consumption. Consumption was up by 1.2 million b/d over the same period last year – the product of developing economies. China, in particular, boasted the largest increase in consumption, plotting a trend that shows no real signs of slow-down.

Taken together, these two trends – regional instability and increased energy consumption – pose significant problems for prices at the pump should a nuclear deal collapse and Congress revisit Iran sanctions legislation targeting Iran’s oil exports. While Iran’s oil production and exports have been cut significantly since 2011, further cuts risk tightening world oil markets further and leaving the world vulnerable to major energy price increases. Already, energy prices have risen against the backdrop of the Iraq crisis, and if no agreement is forthcoming in the nuclear talks, the bubble of energy prices could burst.

This could serve to hinder US strategy if nuclear negotiations with Iran stall by increasing the economic risks of both sanctions and military action. As long as developing economies, such as China, continue to demand massive amounts of oil to fuel their industrial and economic expansion, any increase in oil prices will be a serious threat to their economic growth. As such, these countries will steadily become more likely to withdraw from the tough sanctions regime, undermining the regime’s effectiveness and potentially allowing Iran to relieve sanctions pressure without agreeing to verifiable limits on their nuclear program at the negotiating table. This will leave the United States and its allies with little leverage and few good options.

Back to top