The practice of sanctioning economies has become a primary political tool in the arsenal of international politics. From the freezing of a countries’ assets, to export restrictions, sanctions, particularly on Iran, have become a recent focus in assessing the future price of crude oil.
While justifications for such political action may be well grounded, its broader effects on globalized markets would be a worthwhile study. In January, the Iranian export sanctions ended in a quagmire of economic and political circumstance; an oil supply glut and regional pseudo-proxy warfare among OPEC producers.
At a time when there is an international desire to stabilize oil prices, the lifting of Iranian sanctions saw oil prices plummet as expected increases in Iranian capacity were factored into future prices. Adding to this price frenzy, Iran’s OPEC membership raised the credibility of potential collusive action between producers, thereby turning plenty of attention toward political efforts to restrict capacity.
Many politicians and commentators have given high hopes that Iran will be cooperative with other major producing nations in stabilizing prices. However, Iranian support fell short of restraining its previously sanctioned capacity. This was highlighted in Iran’s recent rejection of the Doha proposal.
While such a rejection was assumed in forecast estimates, the same cannot be said for meetings that will take place in the forthcoming weeks between Iran and Saudi Arabia. This will especially hold true given the recent geopolitical tensions between the two Middle Eastern nations. But perhaps the reaffirmation of the status quo is a sign that a politically tenable price is on the horizon and forecasts can be looked to with a higher degree of confidence.
The removal of an economic sanction against Iran has deepened the supply glut and focused many resources towards the adequate assessment of risk on geopolitical events. This example, of how the effects of an economic sanction can reverberate through the global economy, is most certainly not reflective of all sanctions. But what is important to point out, is that this sanction, concerning the highly globalized and interconnected market for crude oil, did much more than hurt Iran. It affected everyone engaged in the production of oil, and the many institutions that oil production support.
Perhaps, it would be smarter for leading politicians to focus their sanctioning efforts not on the oil and gas markets but on markets less globalized. A policy such as this may offer a suitable compromise. The reaffirmation of the status quo (the removal of sanctions) is a sign that a politically tenable crude oil price is on the horizon and forecasts can be looked to with more an emphasis on the fundamentals of supply and demand rather than geopolitical variables.