Could a new Iran, free of sanctions become once again a major player in the global and oil market offering huge opportunities for international investors but posing new challenges to price levels if supply outstrips demand?

A year of challenges for Iran

For the current Iranian regime 2024 was certainly a bad year.  The proxy groups which Iran has funded and armed – Hamas in Gaza; Hezbollah in Lebanon and the Houthis in Yemen have all suffered serious defeats in their varying confrontations with Israel.  The arc of resistance has been largely destroyed.  At home the Iranian economy is weak and the impact of sanctions on investment in key infrastructure is beginning to have a serious effect on daily life with rolling power cuts even in Tehran and other major cities.

Iran is not Syria

Despite all this, suggestions that the Ayatollahs will be overthrown and will follow Assad into exile should be treated with scepticism.  Iran is not Syria. The administrative structure of the country is well established and very different to the corrupt family business which existed in Syria.  There have been a series of challenges to the government in Tehran from the student riots in 1999 to the “Green movement” of 2009 and the protests over women’s rights in 2022. Each was built up by Western media as the prelude to regime change but in the end each of the protests ended in failure.  

By contrast to Syria and many other countries across the region normal life for those prepared to stay silent about politics continues. There is a substantial middle class across the country and the economy though damaged has not been broken. No doubt many Iranians would like to see the end of the current regime but there is no obvious desire for the civil war which that might entail.  For the time being the theocracy is in power but Islamic rules are enforced in name only.  Iran is not Afghanistan.

Pragmatic approach to external threats

2024 has reminded us that the collapse of existing regimes is always possible but in Iran the chances of a revolution seem slim.  Nevertheless, a different form of change is possible.  The existing regime could adapt to the changing realities around them.  Pragmatism could triumph over fundamentalism in the cause of the absolutely prime objective of preserving the Islamic Revolution.

There are some signs that pragmatism is already present in the thinking of the Government in Tehran.  Iran offered no resistance as its allies in Gaza and Lebanon were defeated. The limited rocket attacks on Israel were token gestures – brief and minimal.  The Houthis were not encouraged to attack the ships carrying the daily flow of oil from the Gulf to the world market.  Any stronger resistance would have been met by overwhelming force far outmatching the firepower and capabilities of the under equipped Iran military whose main purpose seems to have shifted from preparing for conflict to making money through the numerous companies they control.  Resistance could have provoked a rapid and humiliating defeat.  There is clearly no desire in Tehran to escalate a conflict which cannot be won.

That pragmatic response has now been followed by the renewal of talks with Germany, France and the UK designed to manage the development of Iran’s nuclear capacity and the overhanging fear that Iran will acquire nuclear weapons.  President Pezeshkian has also indicated a willingness to open a new dialogue with the United States.  Engagement with the prospect of concessions appears to be preferable to the risk of a direct attack on Iran’s existing nuclear facilities by Israel with support from a new American administration.  

The signing of a new alliance treaty with Russia earlier this month appears to be focused pragmatically on securing much needed gas supplies for Iranian consumers in return for the supply of more Iranian drones and other armaments.  Given the lack of Russian support for their long-term ally in Syria no one is likely to trust Russia as a source of protection.  

Opportunities for international trade and investment?

The open question is whether this defensive pragmatism could lead to a wider re-engagement of Iran with the rest of the world – opening up trade and investment not least in oil and gas.  Iran’s resources are vast in scale – with some 208 billion barrels of known oil reserves, 1,200 trillion cubic feet of undeveloped gas and substantial but unquantified amounts of key minerals.  Much of the country remains unexplored.  

Iran would need international technology to develop new resources and many of the international energy companies would welcome the chance to return to an area which until the end of the 1970s was a major source of supply to the world market.  Several have maintained links including offices across the border in Jordan to watch and wait for the door to open.  That cannot happen until sanctions are lifted but the industry is certainly ready to engage.  Iran needs not only new developments to replace existing fields which are in decline but also investment in infrastructure and the modernisation of the economy.

The lifting of sanctions would not have an instantaneous effect, but it is quite conceivable that within two years of sanctions being lifted Iranian oil production and exports could rise from just over 3 million barrels a day to 5 million or more.  In addition, Iran could become one of the world’s major suppliers of natural gas within 5 years.  

The way forward

Iran’s return to the market would disrupt the current Saudi domination of OPEC and could push prices down. The outlook for oil and gas demand, however, remains strong, especially in Asia and if Iran became a supplier of key minerals, it would provide an alternative to growing dependence on China.

The economic potential – both for Iran itself and for international investors is matched by the political gain if Iran were to move from being a sponsor of terror to being a force for cooperation and stability across the region – extending the concept of engagement which underpinned the Abrahamic accords which led to the recognition of Israel by some of the Gulf States.

Optimism about the Middle East is usually misplaced and ends in disappointment. No one should bet on pragmatism triumphing over fundamentalism.  But the dramas of the last 18 months are far from over.  The political and economic map of the Middle East is being redrawn.  Each country is changing in its own way and at its own pace.

2025 will not be boring.

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By Nick Butler

Nick Butler is a Visiting Professor for Kings College London. Formerly GVP for Strategy and Policy Development at BP, and subsequently Senior Policy Adviser to British Prime Minister Gordon Brown. Member International Advisory Council of Equinor from 2012 to 2018. Butler is also Editor of ONS Energy Agenda, a biennial report addressing global energy issues and presenting challenges and potential responses.