In 2015, the United States and its allies 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. Congress approved the deal, but in 2018, President Trump backed out of it and resumed economic sanctions on the Islamic Republic of Iran.

Then, on Jan. 2, 2020, U.S. forces killed a top Iranian military general with a done strike, igniting concerns about how and when Iran and its allies might retaliate. Oil prices spiked in response given Iran's massive oil reserves and its role in the global petro-economy.

Iran's Oil Production Capacity Has Diminished in Recent Years

In 2018, Iran accounted for only 4% of total daily oil production, producing just over four million barrels per day, according to the Energy Information Administration (EIA).

Iran, which is a member of the cartel, sits upon 13% of global oil reserves. It produces over four million barrels per day, accounting for 4% of total global production. However, economic sanctions by the U.S. and other countries have diminished the Republic's exports in recent years.

Iran Oil Exports
Chart courtesy FRED.

World Oil Supply and Demand

According to the International Energy Agency (IEA), total production, measured in barrels of oil produced daily, is around 94.7 million barrels. That's slightly lower than the 96.3 million barrels per day in 2015. Total global consumption is around 99 million barrels per day. Iran is the seventh largest producer if crude oil in the world.

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. In 2019, OPEC members and its allies, OPEC+, agreed to cut production by 500,000 barrels per day to boost prices, which had been on a downward trend since October of 2018.

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.

Iran is believed to have stored around 25 million barrels of oil, but that amount 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 by itself 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

When the nuclear deal with Iran was announced in 2015, 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.

Furthermore, countries like the U.S. and China have become more efficient producers of their own oil. In 2018, the U.S. became a net exporter of oil given the increase in shale production and other methods.

The Bottom Line

Iran does not have the global influence on oil prices it once had in the 1970s and 1980s. Economic sanctions have hurt its ability to produce at capacity just as other developed countries have improved and increased their own oil production. Recent tensions between Iran and the U.S. are also likely to put more pressure on Iran's production capabilities despite the recent rise in the price of crude oil.