Iran’s influence on the oil market and the fate of the US oil industry
| September 17, 2013
Reading the Financial Times, I just stumbled across a rather worrying statement by one of "the best oil and gas microeconomic analysts on Wall Street" according to the author of the article.
Bob Brackett, the supposed oil and gas wiz, is a geologist at the Bernstein brokerage and argues that Iran could suddenly throw 1 million barrels a day on the market, thereby plunging world oil prices by $10 or $15 and making 15 percent of the number of rigs drilling for oil in the U.S. financially unbearable — the end for U.S. energy independence.
What to make out of such a statement? The first question, of course, is whether Iran would throw a 1 million barrels a day on the market in the short-term future. This depends mostly on whether sanctions by the U.S. and EU will be lifted.
According to OPEC, Iranian oil exports have dropped from 2.5 million barrels a day to 1.5 million barrels since the implementation of the sanctions in July 2012 (and the difference is what makes up the magic 1 million barrels Brackett is talking about). This has hit the country's economy hard and, as most people think, would force Hassan Rouhani, who is about to take power Aug. 3, to change the Iranian course on uranium enrichment.
At least, this is the official story. From a more pragmatic point of view, some analysts like Steve Hanke would suggest otherwise. According to him, Iran is still far from giving in, and its economy much more sturdy than anticipated. He argues, for instance, that despite the sanctions Iran's current account is still in significant surplus. This is because the impacts of the sanctions have been partly offset by an increase in nonoil exports such as cement and iron ore, and also because other countries like China, India and Malaysia have filled the void left by Western importers.
Yet, even if Rouhani decides to turn Iran's course toward the West, the second and more important question is whether such an increase in global oil supply can have the anticipated impact on global fuel prices. The answer to that is also not that straightforward, because nobody can forecast oil prices, not even an oil and gas guru.
If one assumes the decrease in Iran's export one year ago led to an increase in oil prices similar to the anticipated price decrease from a sudden lifting of sanctions, the answer is no. For instance, the IMF forecasted in January 2012 that the oil sanctions could lead to a 30 percent increase of oil prices. What happened, however, was that on average oil prices even fell after July 2012.
Also, what some forget is that Iran is not a big player on a comparative scale. For instance, the U.S. alone has strategic reserves of more than 4 million barrels per day for over 90 days and Saudi Arabia has an excess production capacity of 2.5 million barrels.
In any case, a decrease in fuel prices would also not be in the interest of Iran, especially right at the moment with a comparatively sluggish economy. Finally, this also leads to another question — Is Iran still in the position to retaliate against the sanction regime and would this affect the global oil market?
When the U.S. and EU announced sanctions last year, Iran threatened with the closure of the Strait of Hormus, through which flows 20 percent of oil traded globally. What happened so far is nothing. And this will remain like that because it is simply not in its interest as an oil producer. Yes, the "oil weapon" has been used by other countries before (see OPEC 1973), but it would be certainly counterproductive to Iran.
Of course, nobody knows what will happen for sure. If I would be able to forecast world oil prices, I would be a millionaire by now. But I hope that I shed some light on the true influence of Iran on the global oil market at large and the U.S. in particular.
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