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Why Cheap Oil Means the End of Nuclear Iran

While Americans applaud oil’s 16% price drop ahead of the summer driving season, the dip could have much wider ramifications than just lessening pains at the pump. Namely, if oil prices stay low, it could (finally) put an end to Iran’s standoff with the West over its nuclear development program.

To economically combat Iran’s nuclear activity, the West has employed various sanctions for decades. But in the last few months, sanctions have been ramped up and the severity of pressure increased.

The European Union’s ban on Iranian oil imports, for instance, immediately sent Iran’s currency, the rial, plunging 10% and its value has continued to fall ever since. The banking sanctions of January 2012 have also been exceptionally effective because they froze assets of the Central Bank of Iran and, according to Anthony Cordesman of the Center for Strategic and International Studies, “really had a major hit.”

Under the pressures of these two sanctions, the country’s prices for everyday goods and services are surging and unemployment is rising. And Iran’s economic squeeze is only going to get worse, as the EU embargos don’t take full effect until July. Not to mention that U.S. diplomats are now encouraging India to cut Iranian oil imports by 20%.

Prior to these sanctions, Iran’s bargaining chip was always oil. The fear has been that if Iran’s supply were removed from the market, global oil prices would rise dramatically. In fact, the Tehran Times featured a headline in April that expressed this point bluntly: “High Oil Prices Help Iran Fight Sanctions.”

However, to Iran’s chagrin, that line of reasoning no longer appears sound. Iran’s exports of oil have already fallen 500,000 barrels per day, and when the European Union’s embargo takes hold, it’ll cut another 500,000 from exports. Even if Iran can find willing trading partners to mitigate the losses, sanctions now prevent any vessel transporting Iranian oil from obtaining shipping insurance, which only drives the shortfall further.

Despite this substantial decrease of Iranian oil on the market, the price of crude has dropped from $103 to $92. This trend toward relatively low prices demonstrates two points.

One, Iran’s threat to remove oil from the market is weak at best. And two, it’s unproblematic for the West to maintain its current embargos into the foreseeable future.

In fact, even if prices were to rise significantly, Americans would remain unfazed. I’ve claimed before that high oil prices won’t derail America’s economic recovery and have been right so far.

As I argued then, oil would have to rise to at least $140 per barrel before anyone in the West started calling for Iranian oil on the open markets. That’s a 52% move, and even if the trend heads in that direction, it would take far longer to hit that mark than Iran would be able to suffer an ailing economy.

All contention aside, Iran simply can’t be allowed to continue its uranium enrichment programs. If we hope to avoid military action, low oil prices are signaling that our hope is justified. Iran’s negotiating power has been quickly crumbling, and if oil prices stay low, you can expect its nuclear ambitions to do the same.

Ahead of the tape,

Matthew Weinschenk

Matthew Weinschenk