The United States and its allies have negotiated a deal with Iran that would lift many of the economic sanctions that have been placed on the country to curb its nuclear program. If Congress approves the deal, Iranian oil will be widely available for the first time in years. When Iranian oil begins to flood the market, it will influence the world oil supply and oil prices – eventually.
World Oil Supply and Demand
The world oil supply is constantly in flux, and commodities traders are hard at work trying to earn as much as possible while the price of oil rises and falls according to changes in supply and demand. Due to the nature of the world’s energy production and needs, tracking oil supply and demand is fairly straight forward. (For more, see Oil Price Analysis: The Impact of Supply & Demand.)
According to the International Energy Agency (IEA), the world oil supply, measured in barrels of oil produced daily, has been steadily increasing since 2013. In Q2 2015, the average production was 96.39 million barrels per day. This includes all oil produced anywhere in the world, including the United States, Canada and Middle East.
The IEA also tracks oil demand. This has been trending upward as well, but it does fluctuate depending on economic factors. When people have less disposable income, they drive less and spend less on gas, bringing demand down. However, oil demand is made up of both consumer, commercial, and industrial demand, so just because people are driving less does not mean that oil prices will fall dramatically. In Q2 2015, demand matched supply exactly at 96.39 million barrels per day.
When supply surpasses demand, the price of oil falls. When demand is higher than supply, prices rise. Each country and producer decides how much oil to produce, which is why alliances like the Organization of Petroleum Exporting Countries, or OPEC, can change the price of a barrel of oil by deciding to increase or limit production. (For more, see OPEC's Decision Sends Oil Stocks Lower.)
The world oil supply may increase if the pending Iranian nuclear program deal is approved. Iran has been under trade sanctions for years, with United Nations members agreeing to embargo all Iranian oil. This embargo limits the oil supply, and the aforementioned deal may bring Iranian oil back into the market.
Iran Nuclear Deal
The Iran nuclear program has been a very controversial point of contention between the Islamic Republic and the rest of the world. Israel fears that an Iranian nuclear program would open up the Jewish state to an existential threat. The United States and European Union agree that Iran should remain nuclear-free, but Iran has friends of its own, namely Russia and China.
After years of sanctions and embargoes, negotiators from the United States, United Kingdom, France, China, Russia, Germany and European Union found a compromise with Iran that would delay and add monitoring to Iran’s nuclear program in exchange for lifting sanctions, including those on oil exports. (For more, see The Real Test of the Iran Deal.)
The deal is not a guarantee, however. Before the United States can officially enter into the agreement, Congress must approve it, and there is a very good chance the legislative body will say no. (For more, see CNN/ORC Poll: Majority Wants Congress to Reject Iran Deal.)
Iranian Production Capacity
Due to the sanctions, Iran’s ability to produce oil has declined over time. Oil production requires expensive equipment that is slow to deploy and expensive to maintain, and the aging oil infrastructure in Iran has severely limited production capacity.
The country continues to produce enough oil to meet its own needs plus what it can store and export on the black market, but according to OPEC, total production is only 3.1 million barrels per day. That is about 3% of the world total.
Iran is believed to have stored around 25 million barrels of oil, but that is not enough to flood the market and drive a steep decrease in prices. If the sanctions are lifted, production will slowly ramp up to pre-sanction levels, which alone still will not cause a significant change in the market.
One expert estimates that it will take a full year to add 500,000 barrels per day to current production. Iran does have large oil reserves, but it will take some time to access them.
Influence on Oil Prices
Right when the nuclear deal with Iran was announced, oil prices fell about 2%, but the decline was only temporary. While traders initially feared that Iran could flood the market, we now know that it simply does not have the ability to do so immediately. (For more, see Iran Nuclear Deal: This is What it Means for Oil.)
In the long-term, Iran can build up significant production that may change the oil markets. Iran’s oil minister stated that leaders in Tehran want to get back to pre-sanction exports to Europe, when Iran was providing more than 40% of European oil. New demand from China could divert some of that supply or drive Iran to increase production to satisfy the demands of all regional neighbors.
However, China’s unprecedented economic growth may be coming to an end. That change in demand may do more to lower oil prices than an increase in Iranian production. (For more, see Coming Down to Earth.)
Oil production has boomed in recent years in the United States, and Saudi Arabia and other OPEC countries have kept production at high levels despite falling oil prices. While Iran can make a modest impact, it cannot greatly lower prices on its own in the short-term.
The Bottom Line
Iran may be at a turning point in its relations with Europe and the United States, and the nation may be on the verge of rebuilding its aging and stagnant oil industry. While the new exports will do a lot to boost Iran’s economy, the oil exports are not enough to significantly shift the world oil supply.