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Why could sanctions against Iran affect the global oil markets?

Ingrid Pan, CFA

Why Iran’s nuclear program affects oil prices (Part 1 of 4)

Sanctions against Iran

Currently, the United States and other countries have imposed sanctions against Iran in response to the country’s nuclear activities. According to a statement from the U.S. Department of State, “The United States, the member states of the European Union, Japan, the Republic of Korea, Canada, Australia, Norway, Switzerland, and others have put in place a strong, inter-locking matrix of sanctions measures relating to Iran’s nuclear, missile, energy, shipping, transportation, and financial sectors.” The purpose of the sanctions is to prevent the transfer of items (like weapons and technological devices) to Iran’s illegal nuclear and missile programs, to target sectors of Iran’s economy related to its nuclear proliferation actions, and to persuade Iran to enter discussion with the U.S., China, France, Germany, the UK, and Russia over its nuclear activities. These countries have asserted that if Iran were to fully comply with its international nuclear obligations, it would be an important step towards lifting the sanctions.

Effects on Iran’s oil exports

The European Union (or EU) imposed an embargo on oil imports from Iran last year. Plus, the U.S. doesn’t import oil from Iran and has also threatened to cut off foreign financial institutions that dealt in oil with Iran from the U.S. financial system. Largely as a result of these measures, Iran’s oil exports fell from roughly 2.2 million barrels per day in 2011 to less than 1 million barrels per day currently.

Iran’s economy suffers from the loss of oil revenue

Earlier this year, Iran’s Oil Minister stated that the reduction of exports resulted in a loss of between $4 billion and $8 billion per month. Oil is one of Iran’s major exports, and the revenue loss to the country is significant. The loss of funds from oil sales—in addition to cutting off Iran from the international financial system—has caused Iran’s currency, the rial, to devalue. Because the rial is so weak, the cost of imported goods has soared, and inflation is currently at an official reported rate of ~40%.

To learn about how talks around Iran’s nuclear situation could affect oil prices, please read on to the next part of this series.

Continue to Part 2

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