Global oil supply destined to increase as Iran and the West reach historic diplomatic breakthrough

images8LN7NXITDespite internal opposition, Iran’s new president, Hassan Rohani’s more open foreign policy has started to show results. Today, Rohani addressed the World Economic Forum in Davos, clearly showing that Iran has shaken off the international isolation it built up during the presidency of Mahmoud Ahmadinejad. Meanwhile, the International Agency for Atomic Energy (IAEA) in Vienna confirmed that Iran has suspended the production of 20% enriched uranium, thus fulfilling the conditions that were recently established in Geneva, enabling UN Secretary General Ban Ki-moon to invite Iran to fully take part in the “Geneva-2” peace conference for Syria, which started yesterday. Geneva is a short distance away from Davos. In other words, Iran and the West have reached the most important diplomatic breakthrough since the time of the Shah – over 30 years ago. This shift has launched a new oil market dynamic.

Iran will now be allowed to cash in some five billion dollars in oil revenues, which it had been banned from repatriating because of the number of financial penalties owing to its  nuclear policy. Those same penalties kept Iran’s banks from being able to operate in the international SWIFT circuit, blocking of hundreds of billions of dollars. Moreover, the EU is now discussing – and is sure to approve – the lifting of restrictions that prevent the insuring of ships carrying Iranian crude along. The EU will likely also remove a European ban on the purchase of products derived from Iranian petrochemicals. The loosening of the grip over the Iranian economy will make it easier for the growing economies of the Far East from China to Japan to purchase Iranian oil. For now, the deal is limited to an initial period of six months and it does not yet include an end of the EU embargo on the purchase of Iranian oil – in force since 2012.

Rohani will also open up Iran to European businesses; he will try to convince the Western elite, much of which will be at Davos, to return to Iran, which has already started to attract German businessmen in droves. Rohani has presented the successes of his Swiss diplomatic tour as a “bowing of the great powers in the face of Iran”, but that is a statement for Iranian conservatives as he vigorously pushes ahead a very pragmatic agenda. Meanwhile, the world remains eager to tap into Iranian oil and gas. When that market opens up, crude oil prices should drop much to the chagrin of the Saudis. It will, nevertheless, slam the market wide open for western technology and oil companies to set up shop. Iran needs to upgrade its infrastructure and is in all but desperate need to build up its refining capacity – both for internal supply and to increase the value of its oil exports (just as Saudi Arabia does).

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Rohani said that Iran will have a new and attractive investment model for oil contracts by September. Rohani has invited European companies especially the big energy groups, to evaluate the economic opportunities in Iran: “The Islamic Republic of Iran is ready to engage in constructive cooperation for the promotion of global energy security due to its vast resources of oil and gas,” he said, after holding a meeting with Western private sector managers at Davos. That meeting was attended by Italy’s Eni, France’s Total, Britain’s BP, Russia’s Lukoil, GazpromNeft and several other companies. The meeting is also rumored to have attracted executives of U.S. companies such as Exxon Mobil or Chevron.

Rohani has promised to pursue a foreign policy of “prudence and moderation” to restart the economy, adding that Tehran wants friendship and cooperation with “all countries that the Islamic Republic of Iran recognizes”. Rohani did not mention Israel, but a successful outcome (in Iran’s case success merely has to mean Bashar al-Asad’s remaining in power) may also open up some channels to Israel. Ironically, in a case of ‘unintentional diplomacy’, Rohani’s plane was parked right beside the plane used by Israel’s Prime Minister, Benjamin Netanyahu on the tarmac at the Zurich airport…


  1. It will be interesting to see what happens here and whether it opens and other doors between the West and Iran.Good article Alessandro.

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