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Q&A: Will new Iran sanctions dent Iran's oil industry?

The EU today implemented tough new Iran sanctions aimed at curbing Iran's nuclear ambitions. The sanctions specifically target Iran's oil industry, which accounts for roughly 80 percent of Iranian exports but faces numerous challenges.

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While the IEA predicts Iran's oil will wane, analysts project neighboring Iraq could boost its production to 3 million to 4 million b.p.d. in the next five years. If the IEA's estimates are correct, that could put Iraq slightly ahead of Iran in terms of production.

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In addition to 11 deals awarded last year to international oil companies in Iraq, Italian firm Eni SpA is currently assessing bids to open 100 new oil drills in southern Iraq, the Wall Street Journal reported earlier this month. Russian oil giant Lukoil has also said it will invest $5 billion to develop an oil field in the country's south, while Exxon Mobil is spearheading an effort to boost production through a water-injection system, the Journal added.

Will these factors change the dynamics of the Middle East?

Analysts say that even if Iran's oil revenues fall, the country will keep its foreign-policy priority of being a regional heavyweight that funds groups like Lebanon's Hezbollah. "They will jettison lots of things, including social programs, before they give way on geopolitical preeminence, and the nuclear program," says Kupchan.

New sources of friction could arise, however, as Iraq joins the ranks of major regional oil producers. It is unclear how Iran would react to being surpassed in oil production by the nation it has considered its "younger brother," says Kupchan. One possibility is "increasing strains between an aggressive Iran and an already newly assertive Iraq in a context where Iran has ... shown it is not averse to creating trouble on the borders and acting very provocatively in the region."

The potential for conflict also exists over oil and gas fields that Iran shares with Qatar and Iraq.

But as oil prices remain relatively high, sanctions and increased Iraqi production are not likely to produce significant changes in Iran, says Dr. Maloney.

"It's important to recognize that this is a country that has endured gigantic economic hard-ships in the past and has found a way around it," says Maloney. "What is going to change Iran is the internal dynamics."

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