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Global Glut
The Terrible Timing of Tehran’s Oil Resurgence

Iran’s oil minister wants to ramp up his country’s production by one million barrels per day within weeks of the formal lifting of Western sanctions, but as that moment draws nearer the crude realities of accomplishing that task are making the plan look more like a pipe dream. Sanctions are expected to be lifted sometime in the first half of next year, but logistics already threaten to play spoiler. First we learned of concerns over Iran’s oil tanker fleet, and now the WSJ is reporting that Iran’s aging pipeline infrastructure is springing leaks:

Iran’s aging infrastructure is in disrepair after several years without the expertise of the world’s largest oil companies, western and Iranian officials say. The country is likely to be selling as much as 500,000 new barrels of oil into an already saturated market for crude exports, setting up logistical hurdles. […]

There are…serious questions about Iran’s oil infrastructure. The oil fields in southwestern Iran expected to produce the new output are aging, Iranian officials said. Many pipelines are over 40 years old while many operators lack the sort of sophisticated well maintenance techniques of departed foreign companies.

When Iran recently conducted a test to see if its infrastructure could cope with a sudden increase, “there was some leaking of pipelines,” Iran’s oil minister Bijan Zanganeh said in response to a question from The Wall Street Journal.

But there’s an even bigger problem with Iran’s plan to boost production: The world is swimming in crude at the moment. Supply already vastly outstrips demand, and with American shale producers, Russia, and the rest of OPEC all seemingly keen on keeping the crude flowing, there’s no sign that this glut might be abating anytime soon. It’s in this market that Tehran hopes to expand its influence—a market with prices hovering above just $40 per barrel, far below the $100+ prices oil was fetching as recently as the summer of last year.

OPEC meets later this week to discuss its strategy, but it doesn’t seem likely that the Saudis are going to budge from their do-nothing strategy—after all, if the decision not to cut production hurts Iran, all the better. And without Riyadh’s cooperation, there’s no chance that the cartel can make the meaningful supply cuts necessary to set a price floor. It’s a very bad time to be selling oil, but if you’re a buyer? Heady times, indeed.

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  • Jim__L

    The thing is, oil in the ground is money in the bank.

    We need to be able to take advantage of this short-term adversity for Iran, as it is surely only short-term.

    • f1b0nacc1

      Perhaps, but I wonder. If new production methods keep coming online, and if the West (through alternative sources – such as they are – and lower overall consumption) reduce demand, will prices stay high enough to make taking it out of the ground worthwhile?
      In absolute terms, of course, you are right, but there is the question of opportunity costs for Iran.

      • Andrew Allison

        Permit me to introduce you to the law of supply and demand [grin].

        • f1b0nacc1

          Commodity prices tend to be more responsive to supply, as demand is far less elastic than with secondary goods. Unless you believe that the third world and candidate first world economies (the BRICS for instance) are going to actually grow and expand their consumption (I don’t think that this is hugely likely, they are as a rule far, far too corrupt, and too deeply wedded to statism), then demand isn’t going anywhere very soon…

          • Andrew Allison

            Agreed, but that wasn’t the point I was addressing, namely that demand (or lack thereof) will establish the price. The problem for producers today is over-supply, not lack of demand (oil and gas are being substituted for coal). US producers cannot currently export, and the US is, to all intends and purposes, only importing sour crude. The ROW producers are both low-cost and rely on oil revenue. In simplistic terms, the ROW sets the price for US shale up to the price at which US shale is profitable.

          • f1b0nacc1

            Agreed, but oil (like money) is fungible. If the US isn’t important as much as in the past (true), then that ‘slack’ is available to sate overall world-wide demand, hence depressing price. More to the point, however, China’s economic stall, and the fall of the BRICs in general (neither of which I think is temporary, but rather a harbinger of a developing trend) will likely put a cap on demand going forward. As this occurs, newer technologies will (and are already doing so) come in play that increase efficiency and further depress demand.

          • Jim__L

            Personally I doubt that China’s stall will last for more than a couple of years, and that clock started ticking months ago.

            I still say we need to make hay while the sun shines. At the very least, the GOP should be putting together plans on what to do about Iran DAY ONE through month six of a Republican presidency, as the window of opportunity will likely only be a few months long.

          • f1b0nacc1

            While I don’t agree with you re: China (their systemic problems might be temporarily overcome on a sporadic basis, the underlying foundation is rotten), we agree completely regarding the importance of the GOP being ready to take immediate, decisive steps from the moment that they take power in 2017.

          • Andrew Allison

            US producers cannot currently export, . . . , and foreign producers of sweet crude can’t sell it here because of the West Texas-Brent spread . Fungible?

          • f1b0nacc1

            My point exactly…..oil that isn’t sold here because it isn’t profitable to do so (largely because domestic production has been revolutionized) is available elsewhere in world markets where it acts to keep prices down. Hence even though the US isn’t exporting oil, and its increased domestic production pushes down world prices.

          • Andrew Allison

            I’m afraid I don’t understand. Oil produced here is NOT available elsewhere, thus its production can have no effect on world prices. If it did, there would be no West Texas-Brent differential.

          • f1b0nacc1

            For example:
            The US consumes 1000 units of oil, and produces 500. This means that the US must import 500 units of oil, which reduces the amount available on the world market by 500 units. Now, because of wondrous new technologies, the US is able to produce 800 units of oil, which means that it must only import 200 units. This frees up 300 units to add to the world market, increasing supply, and thus reducing price. The fact that the US isn’t exporting any is irrelevant, the secret is that it isn’t importing as much.. The end result is the same, the amount of oil available for purchase on the world (non-US) market is greater post-fracking than pre-fracking.
            Yes, I know that is a gross over-simplification, but the core dynamic is sound.

          • Andrew Allison

            Unfortunately, your dynamic is unsound. As I’ve mentioned, the US is neither importing sweet crude nor exporting any oil. Ergo, the sweet crude produced by fracking can have no effect on world prices.

          • f1b0nacc1

            Perhaps. The problem is that sweet light crude is expensive, and hence often is not used when alternatives will suffice. Fracking makes it possible to forego such substitution, hence making more ‘conventional’ crudes (which would otherwise be used) available.

          • Andrew Allison

            You’re turning into a friendly, change the subject, goat [grin]. Fracking produces sweet light crude — that’s why we no longer import it. And, as the Brent – West Texas differential shows, the US price is lower than the world price. It’s not yet replacing much sour in the US due to the lack of refinery capacity to process it. That will, of course, change over time but at current prices the cost to convert is a deterrent. A complicating factor in the US market, which as I hope I have shown is somewhat isolated, is that electrical power generation is shifting from oil to Natgas. I confess to having now idea how all this will shake out, but still think that your original post was misguided. Respectfully yours.

          • f1b0nacc1

            Actually light sweet is displacing sour quite a bit, particularly in terms of imports from Venezuela (which are notoriously difficult to refine, as a minor side-note). This has a tremendous impact upon refinery capacity (remember that the US has a big problem with shortages, as no new refineries have been built in decades), as well as creating major issues for Venezuela in terms of lost revenue.
            Regarding electric generating capacity, Oil’s share is negligible, and has been for quite some time. Most of the shift to Natgas comes from coal, or new capacity entirely, not from oil. Light sweet IS on the other hand, a big source aircraft fuel, and here the US does sell the refined products (if not the raw materials) overseas.

          • Andrew Allison

            I bow to your superior knowledge regarding electrical power generation; I was misled by the EIA’s estimate that 25% of US oil consumption was for electric power generation [grin]. I didn’t realize that the big switch was from coal rather than oil. I’m fascinated (but not really surprised) by your suggestion that the US, while banning oil exports permits the export of jet fuel. But again, I fear I must ask what this has to do with your initial comment.

      • Jacksonian_Libertarian

        The price of “Fracking” continues to decline, and this puts a falling ceiling on the price of oil, as any increase in prices simply increases the supply of American Oil from “Fracking”. We are looking at long term (decades) lower oil prices. This is wonderful for Modern Civilization which thrives on lower energy costs, as everything becomes less expensive. This also massively cuts the income of the forces of anti-Civilization (aka, the Axis of Evil): OPEC, Russia, etc…

  • Pete

    Low oil prices are good. It’s pinching the mutts and making them squeal liked pigs..

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