More reasons to manipulate the oil market - Western leverage over Iran during nuclear talks

© Associated Press / Ronald Zak

Iran’s Bijan Namdar Zangeneh, Minister of Petroleum, speaks to journalists prior to a meeting of the Organization of the Petroleum Exporting Countries, OPEC, at their headquarters in Vienna, Austria, on June 11, 2014.

A wild card in the seven months of extended negotiations between the U.S. and Iran over its nuclear program is the continuing plunge in global oil prices and its impact on Tehran's finances.

U.S. and European officials said they had a growing sense earlier this year that Tehran and its Supreme Leader Ayatollah Ali Khamenei believed they were weathering the West's international sanctions - despite the halving of Iranian oil exports since 2012, largely driven by a European embargo.

Under an interim agreement reached with the West a year ago, Iran has been receiving $700 million in monthly payments from oil revenues frozen in overseas accounts.

Iranian President Hasan Rouhani also stabilized the country's currency, the rial, over the past year by cutting government spending, particularly on subsidizing food and energy.

But pressure on Iran's finances has re-emerged over the past week, potentially giving the U.S. more leverage in the nuclear talks, which were extended last week until July.

The failure of Iran and global powers to reach a comprehensive agreement in Vienna by a Nov. 24 deadline depressed the rial and the Tehran Stock Exchange, according to Tehran-based businessmen. Optimism had been growing in Iran's business community that a deal was imminent that would bring an easing of Western sanctions.

"Here it's definitely somber in the business community, and shock in the Tehran Stock Exchange," a Tehran-based banker said.

Even more problematic for Iran, though, was the decision by the Organization of Petroleum Exporting Countries, or OPEC, last Thursday to maintain its production output levels. The decision has led crude oil exports to plunge below $70 a barrel from over $110 in recent years.

The drop isn't expected to be reversed in the near future and could have a crippling impact on an Iranian government budget that is traditionally 60% derived from oil exports.

U.S. and European officials believe the drop could increase pressure on Iranian negotiators over the next seven months to make concessions on the future of Iran's nuclear program that they haven't in the past year of talks. What remains to be seen, they said, is Mr. Khamenei's assessment of the depths of the threat to Iran's finances.