July 14, 2015 11:25AM

Iran and the Global Oil Glut

Today’s Iran deal is a victory for U.S. nonproliferation efforts, and while it may not be perfect, it goes a long way towards ensuring that Iran cannot develop nuclear weapons, and that the IAEA will regain crucial oversight access to Iran’s nuclear facilities. But though it is fundamentally an arms control agreement, some of the biggest impacts may in fact be felt in global oil and gas markets, as easing sanctions allow Iran’s hydrocarbon sector to reopen to the world.

Much of the text of the deal focuses on the sanctions which will be lifted in exchange for Iranian concessions on nuclear enrichment and processing. These include agreement by both the U.S. and EU to permit the import of oil and gas, as well as lifting asset freezes and bans on the export to Iran of technology and equipment for oil and gas extraction. More importantly, bans on investment, financing and service provision in the industry will be lifted, paving the way for European and American firms to provide technical services and invest in the country.

Oil prices have been volatile since the deal was announced, falling almost two percent before recovering. The initial price drop reflects the expectation that Iran may release some of its approximately thirty million reserve barrels of oil onto the market as soon as it is able. Iran also has the potential to impact oil prices in the long-term, holding the world’s fourth-largest reserves of crude oil, and second-largest gas reserves. Production has been depressed by sanctions, but once they are lifted, it is plausible that Iran could increase production to its pre-sanctions levels (2-3 million barrels a day) within several years.

A surge in Iranian production will only increase the current global oversupply of oil, driving prices lower, and setting Iran up for a confrontation with its partners in OPEC. This would be good news for consumers, but bad news for American shale producers, whose profits have already been dented by falling global oil prices. Yet, it could also be good news for large U.S. oil firms, opening the door to exploration and joint ventures in Iran.

Such investment may be particularly tempting given the recent closure of Russia’s oil market by sanctions. Companies like ExxonMobil, which lost access to its $3 billion joint Arctic exploration project with Rosneft, may find Iranian alternatives attractive.  The fact that most of Iran’s reserves are onshore fields - rather than hard-to-access offshore or arctic deposits – may also prove popular. American firms will likely be engaging in competition with European firms like ENI and Total, who were the major international players in Iran’s oil industry prior to the current sanctions regime.

Certainly, there are still obstacles to overcome before Iran reenters the market, a fact reflected in the volatility of oil prices this morning. The deal must clear congress, though opponents of the deal are unlikely to successfully overcome a presidential veto. Sanctions mitigation will not take effect for at least ninety days, as the lifting of the sanctions is tied to successful completion of many of the deal’s requirements by Iran. And there is always the risk of ‘snapback,’ the idea that sanctions may be suddenly reinstated if Iran fails in its obligations. American oil companies may be hesitant to get involved in Iran until these risks diminish.

There is no denying, however, that the successful implementation of the deal will have major consequences for global oil markets, driving prices lower and opening up new investment opportunities. Ultimately, some of the biggest winners of the Iranian deal could be U.S. consumers and companies.