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Crude Economics
Iran Unhappy With OPEC Inaction

OPEC has twiddled its thumbs as oil prices dropped by half since June, and one of its members isn’t hiding its dissatisfaction. Iran is set to boost its own oil production pending the passage of a nuclear agreement and the cessation of sanctions, rocking the OPEC boat. Reuters reports:

“It seems (OPEC’s strategy of not cutting output) does not work well, because prices are coming down,” [Iranian oil minister Bijan Zanganeh] told Reuters on Thursday during a visit to Beijing. “We haven’t witnessed stable situations on the market.”

In other words, Iran doesn’t think the cartel is accomplishing its stated purpose: bringing stability to the crude oil market (read: fixing prices). And that’s true; at the Saudis’ insistence, OPEC has let prices fall in order to compete with new producers like American shale operators. In this respect, Iran isn’t unlike many of OPEC’s poorer members (Venezuela, Algeria, and Nigeria come to mind). These petrostates require high prices to maintain balanced budgets, and likewise are none too happy with the way OPEC has approached the price plunge over the past ten months.

But while Iran would like to see OPEC curtail output, it has no intention of cutting back itself. In fact, just the opposite: If the nuclear deal goes through it expects to boost output by 300,000–800,000 barrels per day. For that to happen along with an overall OPEC cut, the rest of the cartel’s members will need to scale back even more. Saudi Arabia is the OPEC member most capable of cutting back output, but will surely chafe at any strategy that assists its regional rival.

Whatever happens, the world’s petrostates will have plenty to discuss at OPEC’s next meeting in June.

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  • Andrew Allison

    The chances of the other OPEC members cutting back to accommodate Iranian production approximate those of a snowflake in hell.

  • FriendlyGoat

    The latest ramblings from Iran’s top Ayatollah sounded to me like he has no plans to actually get a sanction-ending deal from the USA. The actions of Iran with respect to Yemen certainly are not going to get them any help from Saudi Arabia, either.

    • johne843

      You’ve heard of bargaining, right? On the second point you are right.

      • FriendlyGoat

        Well, we might have thought the Ayatollah was bargaining. But when he demands a quick end to all sanctions and all at once, he is volunteering for the U.S. Congress to tell him to go fly a kite. He cannot possibly be mis-reading that Obama not only does not wish to deliver that—–but can’t deliver that. Intentional monkey wrench on display, I think.

        • johne843

          Not out of the realm of possibility. However, a few months ago he insisted that Iran needed 190,000 centrifuges for its “civilian nuclear program.” That was one of his so-called red lines. Most experts agree that, taken at face value, the mullahs word doesn’t mean much, particularly in the process of a negotiation. What does is their vital interests – the survival of the regime and regional power status. They know they need a better relationship with the US in order to achieve these things. The US is willing to hold its nose on regime survival if it means that we can move towards offshore balancing. It’s an ugly trade based on imperatives and constraints.

          Also, in the same speech the Ayatollah said it was possible to develop a more constructive relationship with the US if the negotiations were successful. Make what you will of that, but it doesn’t sound like someone closing the door on a deal. Sounds more like trying to create leverage. Particularly because Iran would want to be able to blame the West for a collapse of the talks. An obvious monkey wrench would do the opposite.

          • FriendlyGoat

            I have supported the idea of the talks for the sake of a deal being better than a knee jerk to bombing things. I also think the Ayatollah is completely unreliable because he can borrow an interpretation of Islam allowing him to be virtuously (in his mind) disingenuous for the furtherance of what he imagines is the “will of Allah”. We always have to keep this in mind.

            Truthfully, Iran has no real need of a peaceful nuclear program and we’ve all kinda known that all along. Net, net, I really don’t know where this is going to end. One bad end is no deal and Americans thinking they need to elect a “Tom Cotton vision” for every issue in this country in order to express our impatience with the single Iran/bomb issue. Our tax, fiscal, social and judicial policies should not all hinge on this one stupid thing—–but they might.

          • johne843

            I share your fears. One potential source of comfort is expressed in this video ( https://www.youtube.com/watch?v=JBdOBH7o4Ag ). In it Peter Zeihan explains why the US has much more leverage than we publicly let on. This is why a deal is more likely than people think.

          • FriendlyGoat

            Yes, these are considerations, and yet Carter, Reagan, Clinton, two Bushes and Obama have not been eager to use military options. Perhaps that is changing. Thanks for link.

          • ChuckFinley

            I do know where this is going to end. Iran will get nuclear weapons. Will they use them against the Little Satan and the Great Satan? They have said they will. Should we take them at their word? Maybe they will merely use them to intimidate their neighbors into lowering oil production in order to raise the price of Iranian oil. Maybe their neighbors are unwilling to go along with that and are accumulating their own stock of nuclear weapons in secret. In any event, there is no positive result that I can imagine from the Iranian Ayatollahs having nuclear weapons.

            The Iranians are pretty obviously not negotiating in good faith. The only way the Iranians are not going to produce nuclear weapons is if they are stopped by force. Bombing Iran is not a good plan but it may be the best of a lot of bad options. Just because bombing the Iranian nuclear production facilities makes sense in this case does not mean that it will make sense in every case. Certainly destroying the Iranian nuclear facilities with conventional explosives is better than a nuclear war, even if that nuclear war remains confined to the Middle East.

            Bombing the Iranian nuclear facilities is also better than widespread nuclear proliferation because a lot of countries decide that they can no longer depend on the United States to protect them from the need to have their own nuclear weapons. If nuclear proliferation starts, it will not be limited to the Middle East. South Korea, Japan, Poland and the Czech Republic could all have their own nuclear arsenals in less than a month if they decided to.

  • MartyH

    As long as shale oil can come online relatively quickly, it will act as to cap oil oil prices. This means that American shale may have ended OPEC’s stranglehold on oil prices-it may no longer function as a cartel, but rather with each country producing the amount of oil it desires. This, of course, will help to hold prices down as these countries to maximize their revenue.

    • Andrew Allison

      I think it’s a bit more complicated than that, and that the fixation on US production is misplaced. Any increase in production will exacerbate the current supply/demand imbalance, i.e. reduce prices, and it’s my guess that if any other OPEC members increase production, Saudi Arabia will follow suit. The Saudis, alone among OPEC members, can afford to let the price sink still further and have made it clear that they will reduce production only in tandem with the other members.

      • MartyH

        But OPEC can’t cut production to drive the prices up, like they used to do. They have lost their pricing power-shale will make up for any cutbacks they make, keeping a lid on the price. Further, many of these countries need the cash that the oil brings in. Their ability to use oil production as a weapon is gone.

        • Andrew Allison

          The US doesn’t export oil, so OPEC (in practice, Saudi Arabia) can still control the price of oil in the rest of the world and hence, indirectly that in the US. As demand for domestic production rises to replace more costly imported oil (still 27% of consumption), so will its price. If-and-when the US starts exporting significant amounts of oil, it will be at the world market price.

  • Blackbeard

    This is the main point of Iran’s push for hegemony in the Middle East. Right now, true, Saudi Arabia will ignore Iran as lower oil prices weaken Iran which is, in part, Saudi Arabia’s goal. But note Saudi Arabia’s striking lack of success in rounding up Sunni support to push Iran back. Also note Saudi Arabia’s lack of success in Yemen, despite having bought the best weapons money can buy. And let’s not forget that the US, at least under Obama, is signaling that we are willing to accept Iranian domination in the ME. And all this is before Iran even tests their first nuclear device which is probably less than five years away.

    It’s not going to be necessary for Iran to actually invade and conquer Saudi Arabia only that the Saudis realize that they could. Then get ready for $200 a barrel oil. Think of all the mischief Iran can do with the revenue that will generate!

  • fastrackn1

    “Iran Unhappy With OPEC Inaction”

    Who cares…let them eat cake….

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