Iraq Crisis May Lift Iran Oil Prospects

Does Iran have a role to play with respect to the future of global oil market dynamics as the conflict in Iraq continues to escalate?

Since the onset of the crisis, oil prices have risen (Islamic militants attacked Iraq’s largest oil refinery) and at the same time, Iran is in the final leg of negotiations that could finally result in the end of punitive sanctions that have crippled its economy for the past several years and made day-to-day life very difficult for many Iranians.

Of course, Iran’s nuclear program is the key issue that’s still on the bargaining table, but even as Iran has stated that it may undertake military action to protect Shiite shrines from attack by Isis insurgents in Iraq, it also seems as though the U.S. and Iran, after decades of strained relations, appear to be on the same side of the current conflict, thereby improving prospects for Iranian oil.

It’s well known that Iran holds the world’s fourth largest reserves of oil and the second largest natural gas reserves and even before the current conflict occurred, the country had already planned to increase its daily oil production by one million barrels – a decision that caused some concern about excess capacity to OPEC countries, said Nader Habibi, Henry J. Leir Professor of the Economics of the Middle East, in Brandeis University’s Crown Center, but that risk has now dissipated since the onset of the insurgency in Iraq.

“That means there’s good prospects for Iranian output to increase, particularly if sanctions against Iran are reduced or removed,” Habibi said.

When he came to power a year ago, Iranian president Hassan Rouhani pledged to reform and revitalize Iran’s oil and gas sector in a big way, and definitely, the quality of management of Iranian oil –which had deteriorated significantly during the tenure of former president Mahmoud Ahmadinejad—has improved dramatically, Habibi said.

Rouhani has entrusted the oil ministry to Bijan Namdar Zangeneh, a seasoned and well respected professional who has succeeded, Habibi said, in bringing back on board a team of top-notch experts “who know what they’re doing.”

The Iranian government has also launched a significant reform program aimed at reversing many of the policies instituted during Ahmadinejad’s presidential terms, one of the most important of which is reducing the capacity of the much-feared Iranian Revolutionary Guard Corps (IRGC)— a paramilitary group whose mission is to protect Iran’s Islamic system— to interfere in the oil and gas sector. That means, “management does not have to deal with that center of power,” Habibi said. If sanctions against Iran are reduced, there’ll be two very important consequences for Iran’s oil and gas sector.