Those sanctions will bite Iran and badly

After the Iran deal was terminated by the US, the geopolitical and economic conditions in the Middle East, and beyond, will not remain the same as it was before. A lot of constants will drastically change. But, the developments in the oil and gas markets will be the most decisive.

This is due to its importance and inclusiveness to the Iranian economy on the one hand and its impact on other countries, whether directly related to the situation in the region or away from it. Some of the oil and gas indicators were affected directly and immediately after President Trump signed the decision pulling out of the agreement.

The price of oil went as high as $80 (Dh294) a barrel and will go through further ups and downs depending on how the crisis pans out as well as other technical factors. At the end of the day, Iran will be the biggest loser for more than one reason. Its oil production will decline by 1 million barrels per day and returning to the pre-sanctions period where it was producing around 3 million barrels compared to 4 million barrels now after the deal was signed.

Bartering

Iran’s exports will be reduced as many countries will try and evade the purchase of its oil to avoid a US reaction. In addition, Iran’s returns of its exports will not be paid in dollars; rather it will receive it in the form of faltering currencies and through bartering for goods and services. These in no way meet the basic needs of its consumer and the requirements of the economy as well as finance aggressive foreign operations.

The severe sanctions will cover Iran’s biogas exports, especially as a large part of it is exported in the form of liquid gas through tankers. Also, its attempts to export part of the gas through Qatar, as was the case in the past, will be met with an American rejection that Qatar cannot compromise on. This means Iran would lose the basic momentum of its national economy, leaving a profound impact on living conditions and affecting the financing of its client organisations abroad.

Here arises an important question: Will there be a shortage of oil and gas supplies affecting oil supplies and the global economy?

Certainly not, thanks to the availability of surplus capacity in the Gulf and Russia, through which they can easily fill the shortfall caused by the decline of Iranian exports.

Market stability

The commitment to output cuts approved by oil producing countries from within and outside Opec could be also eased. The same also applies to natural gas supplies, which will contribute along with the US shale gas, as well as the large rise in Egyptian and Australian gas, to offsetting the decline in Iranian gas exports, especially to the European Union countries, which are not happy with cancelling the nuclear agreement.

This scenario provides strong evidence to the possibility of maintaining the stability in the oil and gas markets without Iran, especially as prices will range between $70-$80 a barrel. Yet, prices will experience some volatility due to the turbulent geopolitical atmosphere in the region and technical factors, related to issues in Venezuela and Nigeria, as well as speculative trading that have been always part of the oil markets throughout its history. This also applies to the production and price of gas.

The foreseeable conclusion of all these developments is: Iran’s failure to respond to the US conditions will lead to the collapse of its economy as a result of the sanctions, which are getting tougher by the day and further exacerbated by Iran’s foreign obligations.

This will create multi-dimensional crises to the Iran’s Mullah regime, the most serious of which is the turmoil and internal protests caused by the collapse of the currency, unemployment, inflation, lack of goods and the deterioration of living standards. This will break the back of the regime despite its roaring in a bid to save the agreement, which ultimately will lead to nowhere.

— Dr Mohammad Al Asoomi is a UAE economic expert and specialist in economic and social development in the UAE and the GCC countries.