Snap-Back for Iranian Oil Might Not Be a Snap

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Written by Daniel Graeber for Industrial Info Resources (Sugar Land, Texas)--Washington's efforts to lower the price of commodities to curb inflation may have some support by way of a return to the Iranian nuclear agreement, but swift implementation may rest in the hands of a deeply divided Congress.

Former U.S. President Barack Obama called the Iranian nuclear agreement, formally the Joint Comprehensive Plan of Action (JCPOA), a substantial diplomatic achievement when it entered into force in July 2015.

The agreement saw Iran forfeit its nuclear ambitions in exchange for better access to the global market. That meant one of the founding members of OPEC was free to put its estimated 2.5 million barrels per day (BBL/d) of oil on the market.

Obama's successor, Donald Trump, however, said the agreement had too many loopholes that would allow Iran to continue with what Washington sees as belligerent behavior on the global stage and tore it up. All of the relief that Iran got from U.S. sanctions under the deal, as well as the legitimate flow of oil, ended in 2018.

Fast forward to 2022 and a global economy coping with an extraordinary supply-side crunch in fossil fuels brought on by the worst outbreak of war in the European region since World War II, and something has to give. Now-high energy prices account for the bulk of consumer inflation and most inflationary readings are at decade highs, in part because of the geopolitical risk premium from the war in Ukraine.

Meanwhile, the argument continues over the wisdom of sanctions. Iran's return to the global economy meant that it was forced to play by global rules, tacitly taming its rogue tendencies. On the other hand, Iran may be better at cheating than it is at playing by the rules, so any loophole would likely be exploited.

For the Biden administration and the rest of the Western community, it may be the former argument that holds sway. Recent developments would only confirm that. Under stifling economic sanctions, Iran is backed into a corner and lashing out. Iranian agents were said to be targeting former Trump officials for assassination, while author Salman Rushdie, the target of an Iranian fatwa calling for his execution, was stabbed recently during an event at the Chautauqua Institution in western New York.

Western backed sanctions, meanwhile, have effectively sidelined around 5 million BBL/d in oil trade and the global economy simply can't handle the stress. Most major Western economies are flirting with recession.

So whether for energy security or global security measures--or perhaps for both--the return to the JCPOA may be a necessary measure given recent geopolitical trends.

"I can't say that there will be a deal, but we're closer than we've been before," said Mohammad Marandi, one of the Iranian delegates to multilateral talks in Vienna, from his Twitter account.

Iran, members of the European Union and those representing the interests of the United States are working from neutral territory in Vienna on a path back to the JCPOA. All parties to the agreement said a return is closer than ever, though there are the inevitable sticking points. And much of the final touches may rest with Washington.

"We continue to believe that diplomacy is by far the best, the most effective means by which to constrain verifiably and permanently Iran's nuclear program, and we've taken a principled and very deliberate approach over the course of the past 15 or 16 months or so with the remaining JCPOA participants," said U.S. State Department spokesman Ned Price. "If Iran is prepared for a mutual return to compliance with the JCPOA, so are we."

The absence of Iran doesn't impact the U.S. economy much as its top supplier is Canada, but for allies such as India, it's another story.

India is the third-largest global oil consumer and is heavily dependent on imports to satisfy its needs. Should India starve, it would have global implications given its relevance in the world's economy.

Meanwhile, energy markets during the Trump era had enough spare capacity from big producers such as Saudi Arabia and Russia to cope with the loss of Iranian barrels, but that's no longer the case. The global economy in 2022 can no longer rely on any spare capacity from the major producers that provided a cushion for the loss of Iran. Some are sanctioned and most, particularly those in OPEC, simply have nothing left to give. But the fate of the deal may rest in the hands of the U.S. Congress, not with Biden or policymakers in the EU.

A 2018 report from the U.S. Congressional Research Office (CRS) notes the fate of the JCPOA may rest in another measure, the Iran Nuclear Agreement Review Act (INARA), which was enacted in 2015 while JCPOA negotiations were underway. "INARA provides a congressional review period during which Congress can pass a joint resolution to disapprove the agreement while the president is prohibited from taking certain steps to implement it," the CRS report reads.

A return to JCPOA might not happen until November of next year. That would be one year after midterm elections and presumably only a few months after the next U.S. presidential campaign cycle begins. U.S. politicking is still in the primary stage, but so far the results are mixed. Trump continues to hold a significant grip over a Republican party that may retake both chambers of Congress, but issues such as abortion rights and Trump's many legal problems could stifle some momentum.

Should the political landscape look decidedly red come next November, it's unlikely the world will be completely free from some of the current supply-side challenges given the Republican party's adversity to break from Trump policies.

"We will continue to consult very closely with the Hill," said the State Department spokesman.

Gregory Brew, a Kissinger visiting scholar at the Jackson School of Global Affairs at Yale University and author of the upcoming Petroleum and Progress in Iran told Industrial Info, however, that there may be some wiggle room.

Obama, he said, crafted the initial agreement so it wouldn't get bogged down in partisan gridlock.

"They know it would get a harsh reaction," he said of Biden's efforts, "so my guess is that Biden's team is working on presentation. But he can do it regardless of what Congress thinks."

Nevertheless, in a U.S. political landscape clouded by conspiracy theories and questions over the very make-up of the democracy, nothing can be certain. Celebrations therefore may be premature.

Industrial Info Resources (IIR) is the world's leading provider of market intelligence across the upstream, midstream and downstream energy markets and all other major industrial markets. IIR's Global Market Intelligence Platform (GMI) supports our end-users across their core businesses, and helps them connect trends across multiple markets with access to real, qualified and validated project opportunities. Follow IIR on: LinkedIn.