After a 15-month suspension, negotiations over Iran's nuclear program will resume this weekend in Istanbul. The five permanent members of the U.N. Security Council plus Germany hope to make progress on an agreement that will block Iran from any path to a nuclear weapon, something Tehran has stated it doesn't want. Years of talks have achieved almost nothing. U.S. and European negotiators might have slightly higher hopes for this round. For the first time, sanctions are causing a drop in Iran's oil exports, adding to the threat of Israeli air strikes on Iran's nuclear complex -- both sources of leverage Western negotiators previously lacked.
Iranian President Mahmoud Ahmadinejad presented a brave face over the prospect of a global embargo of Iranian crude oil. On an April 10 visit to Hormozgan province, Ahmadinejad declared, "I should say that we have so much funds that even if we don't sell for two, three years the country will still be managed easily."
Accepting for the moment Ahmadinejad's claim of two to three years of cash reserves, one wonders whether he has planned for what happens after that. Iran's standoff with the West has already dragged on for nearly a decade and another two years or more would seem unremarkable. Meanwhile, Iran's oil revenues are falling and could drop much lower as the embargo on Iranian oil expands and investment in the oil sector dries up. Western leaders will welcome the leverage they believe this will create for them. But the consequences for the broader Iranian society are likely to be grim. For one possible scenario, Western leaders might want to look to this month's other nuclear flashpoint -- North Korea.
According to the U.S. government's Energy Information Agency (EIA), crude oil accounts for nearly 80 percent of Iran's exports and half of its government revenue. That revenue will decline sharply this year. The International Energy Agency (IEA) forecasts that Iran's oil exports are expected to decline by 800,000 to a million barrels per day starting this summer, down from daily exports of 2.2 million barrels per day in 2011. This could reduce Iran's foreign exchange earnings from oil by a third to almost half later this year.
Iranian leaders had hoped that tight global supplies of oil combined with high prices would make the removal of Iranian oil from the market unacceptable. However, IEA's March 2012 oil market report included a rapid rebound in Libya's production, a jump in Saudi Arabian pumping, and smaller output increases in Iraq, Angola, and Nigeria that are offsetting the export decline from Iran. Meanwhile, weaker than expected economic growth in Europe and China may be limiting for the moment the global demand for oil, making the removal of Iranian exports from the market even more feasible.
Economic sanctions are also inflicting increasing damage on Iran's long run oil production potential. Iran's oil fields suffer a natural output decline rate of 8 to 13 percent per year, a higher production decline rate than most other oil fields around the world. Continuous reinvestment in upstream production is required to offset this natural decline. However, sanctions on Iran's oil industry and banking system are curtailing the foreign partnerships that the Iranian oil industry has relied on. EIA's latest short-term energy report, published on April 10, forecasts that Iran's oil production will decline by about 500,000 barrels per day by the end of this year, down from 3.55 million barrels per day at the end of 2011. In 2010, Iranian crude oil production hovered around 3.7 million barrels per day. Should the EIA forecast for 2012 hold, Iran's oil output will have declined nearly 18 percent in two years, with further substantial declines likely to follow should sanctions continue to restrict foreign investment in Iran's oil industry.