- Intelligence reports from European countries suggest that Iran is rapidly advancing its nuclear program, potentially nearing its first-ever nuclear test.
- Despite its economic troubles, Iran continues to export significant amounts of oil, even under U.S. sanctions, with the possibility of flooding global markets if a new deal is struck.
- Amid the rising nuclear threat, there are claims that the Biden administration’s strategy towards Iran has shifted from prevention to containment, which may pave the way for a new nuclear deal.
Two weeks ago, oil prices tanked after reports emerged that the U.S. and Iran are making progress after resuming talks on a nuclear deal, a move that could ease sanctions on Iran’s oil exports. Israel’s Haaretz newspaper reported that the talks are moving forward more rapidly than expected, with the possibility of a deal being struck in a matter of weeks. Deal terms are likely to include Iran ceasing its 60% and higher uranium enrichment activities in return for permission to export as much as 1M bbl/day of oil. But now a highly controversial report claims that Iran is close to testing its first ever nuclear weapon. Separate intelligence reports published by Germany, the Netherlands and Sweden during the first half of this year have said that the Iranian regime ‘‘…has consistently sought to obtain technology for its illegal nuclear program and ballistic missile apparatus,’’ with the Netherlands General and Intelligence Security Service claiming that Tehran’s nuclear advancements, including the enrichment of uranium “brings the option of a possible [Iranian] first nuclear test closer.“
The Netherlands’ intelligence agency has determined that Iran is “deploying increasingly more sophisticated uranium enrichment centrifuges [and] enlarging its enrichment capacity.” That view is corroborated by Swedish intelligence authorities, which have claimed that, “Swedish technology as products with dual uses and critical cutting-edge products for both civilian and military use is of interest to Iran. Iran procures both technology and knowledge through illegal methods, and develops its own ability through Swedish universities and research institutions.”
Prospects of reviving the Iran nuclear deal have swung dramatically, from near certain in March 2022 to almost nil by the end of the year and now the outlook is bright again. Iran’s dire economic situation is likely to force its hand into eventually accepting monitoring and signing a new nuclear deal sooner rather than later, with the country’s foreign currency reserves having greatly dwindled from $122.5 billion in 2018 to a mere $20 billion in 2021 before recovering to $41.4 billion in 2022. With the rate of foreign currency-denominated capital flight out of Iran running at nearly $5billion per month, Iran is not in a very enviable situation.
There are reports that the Biden administration’s strategy on Iran’s nuclear ambitions has shifted from prevention to containment, making the path for a new deal easier five years after former U.S. President Donald Trump infamously ditched Obama era’s JCPOA. Heshmatollah Falahatpisheh, formerly the head of the Foreign Policy and National Security Committee in the Iranian parliament, has claimed that the Biden administration, “will close its eyes to some of Iran’s energy deals, and [allow] the release of some of Iran’s frozen funds in return for Iran refraining from expanding its nuclear program more than the current level.” Iran’s supreme leader, Ayatollah Ali Khamenei, has said that a deal with the West is acceptable as long as it doesn’t touch the Iranian nuclear infrastructure, a rhetoric similar to the one he voiced when the first deal was signed in 2015.
It’s doubtful whether the Biden administration will be willing to look the other way if Iran actually tests a nuclear warhead.
But assuming a deal is reached, Iran can still flood global markets, even as an OPEC member, given that the country is able to export so much clandestine oil under various cloaking techniques. Iranian crude exports exceeded 1.5 mb/d in May, the highest level since 2018, despite the country still being under U.S. sanctions. Last month, Tehran said it has boosted crude output to above 3 million bpd, again the highest since 2018. However, there’s probably room for more considering that Iran’s current production is considerably lower than the 2018 peak at 3.7 mb/d.
But boosting production from the current level to anywhere close to Iran’s ambitions (former Iran oil minister Bijan Namdar Zanganeh once said that his biggest dream was to increase Iran’s oil output to six million barrels per day) is likely to take years at the very least, thanks in large part to years of underinvestment. Over the past four decades, Tehran has failed to adequately re-invest its oil income into its production capacity or diversify its economy. In fact, since the 1979 revolution, the Islamic Republic has never at any point in time been able to produce more than 4 million bpd.
To complicate matters further, foreign investors have mostly stayed away from Iran’s economy in the four decades since the Islamic Republic was established. Part of the problem here is that the state-controlled economic model wastes more than $50 billion a year on oil and gas subsidies to keep its citizens docile. The result is that Iranians enjoy the cheapest gasoline and electricity prices of anywhere on the globe, but have to contend with high unemployment and inflation due to an economy that relies too heavily on petrodollars. Raisi’s administration has set about major reforms in the country’s subsidies system, but has conceded that runaway corruption has been blunting his efforts.