How a Nuclear Deal With Iran Could Affect Gas Prices

The Obama administration hopes to reach a deal by the end of March.

If the nuclear deal with Iran goes through, eased Western sanctions would allow Iran to export more oil, flooding an already saturated oil market.
If the nuclear deal with Iran goes through, eased Western sanctions would allow Iran to export more oil, flooding an already saturated oil market. –Kevin LaMarque/ Reuters

The Iran Deal

Iran has been developing nuclear technology for years, with Iranian officials saying the program is for national prestige, scientific research, and power plants. For just as long, the U.S. and its allies have been skeptical, worrying that Iran is trying to develop the technology necessary to build a nuclear bomb.

To curb Iran’s nuclear ambitions, the U.S. began enforcing economic sanctions that nearly halved Iran’s oil exports from 2012 to 2014, according to U.S. Treasury officials, but the country has still refused to suspend its nuclear research and development. Though there’s no indication that Iran has actually developed a nuclear bomb, the Obama administration and five other world powers would like to reach an agreement with Iran by the end of March that would ease economic sanctions, provided Iran hugely restrict its nuclear program.

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Why a Deal Would Affect Oil Prices

Making up 72 percent of all exported products, oil is king in Iran.

And for good reason– Iran holds the world’s fourth-largest crude oil reserves, though sanctions have greatly limited their production and foreign investment. While Iran’s current oil production is about 2.8 million barrels per day, Middle Eastern economies expert Dr. Kamran Dadkhah said only about 1 million barrels per day are exported. But a nuclear deal with the country would most likely ease Western sanctions, allowing Iran to increase oil exports.

“Right now if the sanctions were removed, it would take some time, but within a year it could add 1 million more barrels a day to their exports,’’ Dadkhah, an associate professor at Northeastern University, said, adding that Iran would first have to make “great investments’’ in some of its languishing oil fields before that could happen.

On paper, the U.S. doesn’t get much oil from Iran. It doesn’t even make the list of top five countries from which the U.S. imports petroleum: Canada, Saudi Arabia, Mexico, Venezuela, and Russia.

But Iran’s oil exports can still affect U.S. gas prices.

Ilan Goldenberg, director of the Middle East Security Program at the Center for a New American Security (CNAS), a nonprofit that develops national security policy, said a nuclear deal would quickly affect the already flooded global oil market, which would in turn move U.S. gas prices.

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“The bottom line is — right now we also have a glut of oil and low oil prices, so this is going to strengthen and exacerbate things,’’ Goldenberg said of the potential deal. “If you get an agreement in the next couple weeks, you’ll probably see a pretty quick dip in prices.’’

Since September 2014, there’s been a 50 percent drop in U.S. oil prices due to the rise in world petroleum supplies and increased U.S. production through drilling and fracking. There’s also been a decreased global demand, as China’s economy has slowed down and Europe’s has stagnated. Even if it took Iran a year to physically get more oil onto the international market, CNAS foreign policy expert Elizabeth Rosenberg said the immediate psychological impact of a deal would drop oil prices.

“There’s a downward price movement when a deal is announced, when traders try to factor that in,’’ Rosenberg said.

How low prices could go is subject to speculation, but Goldenberg said possibly to $20 to $30 per barrel. When oil prices fell to six-year lows on Monday, March 16, it was $44 per barrel, which translates to a national average of $2.42 at the pump.

What if There’s No Deal?

If there’s no agreement reached between Iran and the six world powers, experts said there’s a strong likelihood more sanctions would be imposed on Iran.

“Iran would have to get out of the oil exporting business entirely,’’ Rosenberg said, “and countries purchasing oil from Iran would have to stop within the next two years.’’ But Rosenberg added that a market awash in oil is well-equipped to “easily absorb’’ that kind of supply reduction. Prices at the U.S. pump would remain low.

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“No deal won’t necessarily cause a huge bump up in prices,’’ Goldenberg added. Oil prices would eventually start to rise to factor in the risk, but that would happen over a period of time closer to six months or a year, he said.

There are a variety of other factors that will most likely keep prices low for the foreseeable future, Goldenberg said, mentioning that Saudi Arabia– the U.S.’s second biggest importer– doesn’t have any plans to stymie its oil production. The Saudi strategy is to hold onto its market share, no matter how low prices get, Goldenberg said.

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