LONDON, Feb 23 – Nuclear negotiations between Iran and the United States are nearing the finish line with an announcement expected soon on a new deal to lift sanctions in exchange for renewed controls on uranium enrichment.
Diplomats have begun briefing journalists on some of the details to prepare legislators, opinion formers and voters for the emerging compromise (“U.S. nears return to Iran nuclear deal”, Wall Street Journal, Feb. 21).
The negotiations are concluding against the backdrop of the tightest oil market for over a decade and worsening relations between the United States and its allies on the one hand and Russia on the other.
U.S. and European negotiators will probably insist there is no link between the nuclear talks, rapidly rising oil prices and the intensifying confrontation with Russia over Ukraine; the “files” are entirely separate.
In practice top policymakers have to take into account the entire diplomatic, political and economic situation, set priorities and make trade-offs, which in this case makes a nuclear deal more attractive.
The changing international landscape, emerging oil shortage, accelerating inflation and the political fallout in North America and Europe have all sharpened the incentives to push the deal over the line.
INFLATION FEARS
Enforcement of existing sanctions has already slackened in the last 12 months, with increasing volumes of Iranian crude shipped to China (“As nuclear talks resume, Iran’s oil exports increase,” Reuters, Feb. 10).
Part of the reason is probably to generate goodwill during the negotiations, build confidence among the negotiators and demonstrate some of the tangible benefits that will flow from a deal.
But with the oil market chronically under-supplied since the middle of 2020 and inventories now below the pre-pandemic five-year average, oil importers need Iranian barrels more than before.
Toughening sanctions enforcement during the negotiations or as the result of a failure to reach agreement would push the market into an even more severe shortage and cause prices to rise even faster, worsening inflation.
With U.S. shale producers and other members of the expanded OPEC+ group of major oil exporters unable or unwilling to increase output further, the market needs extra Iranian oil to avert a spike in prices.
The volume of Iran’s production is secret but the U.S. Energy Information Administration estimates it was around 2.5 million b/d in January 2022 (“Short-term energy outlook”, EIA, Feb. 8).
Output has increased from less than 2.0 million b/d in January 2020 (when sanctions enforcement was tougher) but is still down from 3.8 million b/d in January 2018 (before sanctions were re-imposed).
The global oil market could not afford to lose 0.5 million b/d or more as a result of tougher sanctions enforcement if the negotiations fail to produce an agreement, without a sharp rise in prices (https://tmsnrt.rs/3pagW9s).
If sanctions are eased, the gradual addition of up to 1.3 million b/d of extra oil over the remainder of 2022 and into 2023 could help stabilise global inventories and prevent a further ramp up in prices.
Inflation has emerged as the top economic and political issue with consumers and voters in the United States and Europe, forcing policymakers to examine ways to limit price increases, including permitting more Iranian oil sales.
For U.S. and European leaders worried about the accelerating cost of gasoline, diesel, gas and electricity, and the impact on the cost of living and voters, the incentives to reach a deal lifting sanctions have become strong.
DIPLOMATIC TRIAGE
The sharp deterioration in relations between the United States and European countries on the one hand and Russia on the other has also sharpened the incentives to resolve the nuclear negotiations and sanctions issue.
U.S. policymakers have insisted sanctions against Russia “will not target oil and gas flows” according to a State Department briefing to journalists (“U.S. sanctions on Russia not targeting energy markets”, Reuters, Feb. 22).
But the deteriorating diplomatic and economic relationship with one of the world’s top three oil and gas exporters inevitably adds to uncertainty and could push up prices.
The U.S./Russia conflict over Ukraine has already driven Russia into closer alignment with China, as the Russian government seeks diplomatic, financial and economic support in the face of U.S. sanctions.
This risks frustrating long-term U.S. efforts to separate the two Eurasian powers to concentrate on containing the rise of China, which is seen as a more formidable competitor and adversary.
In the short term, U.S. diplomatic strategy appears keen to avoid pushing the two powers any closer than necessary (“Bond between China and Russia alarms U.S. and Europe amid Ukraine crisis”, New York Times, Feb. 20).
Imposing sanctions on Chinese companies for violating U.S. prohibitions for importing oil from Iran has therefore become more problematic, since it would ratchet up diplomatic tensions in yet another relationship.
More generally, the United States is engaged in three significant conflicts, with China, Russia and Iran, which is more than the White House can handle at one time and is straining military, diplomatic and economic resources.
Prioritisation implies U.S. policymakers need to concentrate on the immediate policy problem (Russia) and their long-term top priority (China) while de-escalating a conflict with is neither pressing nor of the first order (Iran).
For all those reasons, the time is ripe for a renewed agreement between the United States and its allies and Iran that swaps sanctions easing for limits on enrichment and other nuclear activities.
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