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Page added on October 5, 2015
Lifting Iran sanctions could flood worldwide oil market
Iran has faced sanctions for decades, but those implemented in 2012 have taken a severe toll on the Iranian economy. Even if sanctions are lifted, it’s likely the global oil market will remain flooded late into next year, keeping prices low and employees out of work.
In November 2013, Iran signed an interim agreement with China, France, Germany, Russia, the United Kingdom and the United States that provided some sanctions relief. The agreement, known as the Joint Plan of Action, allowed Iran access to $4.2 billion in previously frozen assets in exchange for limiting nuclear production and permitting international inspectors more access to sites.
The JPA capped Iran’s crude oil exports at 1.1 million barrels per day, less than half its 2011 export level. The terms of the JPA will remain in effect until it’s verified that Iran has followed through on limiting its nuclear program, which will likely take several months.
Meanwhile, international sanctions have taken a severe toll on the Iranian economy. In April, U.S. Treasury Secretary Jacob Lew estimated that Iran’s economy was 15 percent to 20 percent smaller than it would have been had sanctions not been imposed. He projected it lost $160 billion in oil revenue alone. In addition, more than $100 billion in Iranian assets have been held in restricted accounts outside the country.
In January, then-Undersecretary of the Treasury David Cohen outlined the U.S. sanctions in congressional testimony.
“Our sanctions have drastically driven down Iran’s oil exports,” Cohen said. “In 2012, Iran was exporting approximately 2.5 million barrels of oil a day to some 20 countries; today, it exports only around 1.1 million barrels, and only to six countries.”
More important, the sanctions have impeded Iran’s ability to acquire material for its nuclear program.
“Iran in possession of a nuclear weapon would directly threaten U.S. and international security, increase the risk of nuclear terrorism, undermine the global nonproliferation regime, and risk setting off an arms race in the Middle East,” Cohen said. “From the outset of his administration, President Obama has made clear that we will do everything in our power to prevent Iran from obtaining a nuclear weapon.”
Still, the nuclear deal reached is not ideal for either side, according to Richard Nephew, program director for Economic Statecraft, Sanctions and Energy Markets at the Center on Global Energy Policy. Nephew also served as the lead sanctions expert for the U.S. team negotiating with Iran, and from May 2011 to January 2013, he was the director for Iran on the National Security Staff, where he was responsible for managing a period of intense expansion of U.S. sanctions on Iran.
The deal provides confidence, however, that Iran cannot get a nuclear weapon without immediate detection and response, Nephew said in a commentary on the nuclear deal with Iran.
“The nuclear deal is therefore an improvement over the status quo and what Iran’s nuclear program would have become had a deal not been struck,” Nephew said. “New oil will not flow from Iran until 2016 and there will probably be less of it than optimists predict.”
He estimates 300,000 – 500,000 new barrels of oil to be on the market within six to 12 months after a deal is signed. Sanctions relief will permit new business with Iran, but uncertainty over Iranian compliance and U.S. politics will deter long-term deals for the next 18 months, he said.
Some have predicted Iran oil exports could reach as high as 1 million barrels per day. It’s hard to predict.
“It looks like the agreement has a good shot of being signed now – so sanctions will be released as I understand it sometime in first quarter of next year,” said Pete Stark, senior research director at IHS in Englewood. “And at that time and probably even before then, I’m sure Iran will cheat, there’s going to be some looseness in the system. But Iran, we feel, some people say will produce 1 million barrels a day – but … we feel like Iran could add 600,000 barrels a day. Over six to nine months we’ll probably have a good slug coming on.”
The World Bank predicted in early August, Iran will add 1 million barrels, lowering oil prices by $10 a barrel in 2016.
“But who knows? There’s no real accurate information other than good educated guesses,” Stark said. “Moving oil back into the market is not just how you can pump, but how you can get it shipped around the world.”
IHS provides global market, industry and technical expertise to businesses and governments in more than 140 countries.
For decades, Saudi Arabia has maintained power over oil prices, Stark said, essentially dictating the price of oil in the global market.
“Since the price of oil peaked in June 2014, the U.S., Saudi Arabia and Iraq have added 2 million barrels a day to the world production market. In the meantime, toward the end of last year, Saudi Arabia said, ‘Hey, we are no longer going to reduce our production to be responsible as the world’s swing producer, which they had done since the middle 1980s.”
The recent crash in the oil market was mostly due to the Saudis flooding the market, along with other members of OPEC, the Organization of the Petroleum Exporting Countries.
That’s where the United States comes in to play, taking over that “swing” role and reducing its production by 600,000 barrels, Stark said.
“It’s up to the United States to reduce its oil production given the premise that Saudi Arabia will refuse to lower its production. Now, the 600,000 barrels we reduce will be offset by the 600,000 in a way that will come into the market from Iran,” Stark said. “And it’s difficult to predict how that’s going to affect world prices.”
Several factors come in to play, such as China’s economy and whether it will have recovered any by then. “That is one of the many, many unpredictable factors in oil,” Stark said.
At its peak, the price of oil is easily more than $100 per barrel. Prices lately have been in the $40-$50 range where they are likely to remain into the first half of 2016, experts have predicted.
Certainly, Iran will be able to put its stored oil – estimated at 30 million to 40 million barrels – on the market, Nephew said in his commentary. “But, that is a lot of oil to discharge at once and Iran will take a price hit if it wishes to move it fast. After that, Iran will have to ensure that its new production increases, and it will be fighting for market share it lost three years ago. This would be hard, even in a higher oil price environment. At today’s price levels, it will be a major challenge.”
Additionally, Iran will have to update its equipment and fields that have been inactive, slowing their production in the short term. Sanctions snap-back provides a threat, too. Companies and banks the develop business with Iran will have to be prepared to pull out immediately if Iran doesn’t follow the agreement.
The sanctions have many layers and will take time to remove fully.
In the U.S., even though the amount of drilling has dropped there’s been only a modest reduction in supply. The reason production has held nearly steady is because oil companies have become super efficient.
“Even with half the rigs, what they ended up with is the very best rigs, with the very best workers, in the very best spots,” Stark said. “That phenomenon has really raised eyebrows.”
The American Petroleum Institute is in favor of lifting sanctions, according to John Felmy, chief economist with API. The American Petroleum Institute represents all aspects of the oil and gas industry. It was formed in 1919 at the request of the federal government. During WWII, much of the U.S. military efforts had been run on coal. With new tanks and planes and other equipment, it recognized a need for better data on oil, Felmy said. API has been producing weekly statistics since 1929.
“The forecast going out to 2030-2040 show significant growth in all forms of energy, but especially oil,” Felmy said. “Virtually all the forecasts show a growing use of oil.
“Sanctions on Iran are a big deal. If you lift those sanctions and Iran is able to export oil, if they bring on 500,000 to 1 million barrels a day and that could create quite a challenge,” Felmy said.
Even if sanctions are lifted, he said it will take time to get production going. “It’s not something that happens instantly,” Felmy said. “It’s not like they can just turn up a pump.”
Places like Iran have such rapidly growing populations; they have to be thinking seriously on a final agreement, Felmy said.
“Iran hasn’t been able to do much but sell what’s in storage,” he said. Even if sanctions are lifted, he agreed the process will be slow. “They’d have to revamp equipment again to get it going. They’d also have to have workers and sanctions reduced the work force.
“Even though oil prices have come down from last year, the longer term forecasts show the global oil market will grow from 92 million barrels a day to well over 100 in the next decade,” he said. “More oil is needed because of massively growing populations like in the Middle East and right now oil is really the only thing that supplies transportation.”
Until something is signed, however, nobody really knows what’s going to happen.
“What you’re looking into is a very complex issue,” Stark with IHS said. It’s going to take cooperation from several countries to re-balance the market.
“If Saudi Arabia and its key partners in the Middle East – OPEC – can make an agreement to moderate their overall production and I don’t think the Saudis will drop theirs at all – Kuwait, Abu Dhabi, Irag and Iran, they’ll have to get some kind of agreement to not go full-bore ahead,” Stark said.
The point being, if China’s economy is still in a slump and Iran and Iraq refuse to compromise on producing, the market will be oversupplied into 2017, Stark said.
“If there’s some cooperation, we could balance out toward the end of 2016,” he said. The likelihood of that happening, though, he said, is anyone’s guess.
10 Comments on "Lifting Iran sanctions could flood worldwide oil market"
BC on Mon, 5th Oct 2015 2:55 pm
http://www.bloomberg.com/news/articles/2015-08-23/iran-favors-holding-emergency-opec-meeting-zanganeh
http://www.bloomberg.com/news/articles/2012-07-12/iran-s-oil-output-costs-to-quadruple-in-coming-years-paper-says
http://www.eia.gov/beta/international/analysis.cfm?iso=IRN
Iran’s oil-production costs will more than quadruple in coming years, Donya-e-Eqtesad said.
The cost of producing each barrel will rise to $30 or more from $7 currently, the newspaper said, citing citing Gholamreza Manouchehri, an adviser to the head of National Iranian Oil Co. He didn’t give a timeframe for the increase.
Iran currently allocates $20 billion a year to develop fields and $10 billion on maintaining output, the report said. In the next decade, maintaining production will cost $50 billion, with a similar sum required for development, it said.
Anyone know if the 2012 estimate for the cost of Iran’s oil production of $30/bbl is still accurate?
BobInget on Mon, 5th Oct 2015 4:52 pm
Alternative plans are in place for coalition members; Iran, Iraq, Venezuela & Russia to destroy Kuwait and Saudi pricing capabilities.
I assure you Venezuela, beholding as they are to China and Russia CANNOT, will not, tolerate oil prices as they are today.
Iraq’s very existence depends on doubling oil prices over the next six months.
When so called sanctions are lifted Iran will be able to access billions of its own funds needed to rebuild its economy. An economy, I’ll add, not totally dependent on exporting oil.
Russia is the key here. Champion chess player, Putin, simply can’t survive at current prices.
Saudi Royals are destroying itself and the oil exporting nation’s future through wasteful, fruitless, depletion. Changes are in the wind.
makati1 on Mon, 5th Oct 2015 9:17 pm
Bob, I think you are either deep into the oily patch with your investments or blind to world economic conditions. When the price of oil goes up, IF it ever does, it will signal the end of the world economy and especially the indebted-over-their-heads West.
Putin can and will not only survive, but come out of this ahead. It forced Russia to become more self-reliant and less dependent on the outside. And they can produce oil for about $5/bbl. according to sources. Not to mention nat. gas, both of which they have in abundance and the world (EU) wants.
As for China, they can step in with a fat checkbook and buy whatever they want at fire sale prices. Then they ship a few hundred or thousand of their surplus young men there to manage/secure their purchases. They have been doing that or a long time now.
Your assessment of the KSA is spot on though. And the sooner the oil/gas/coal ends, the better for all of us and our progeny. They may actually survive.
James Tipper on Mon, 5th Oct 2015 9:35 pm
Mak, I usually agree with your posts, but I curious about the claim they can produce at $5/bbl, is there some data you can point me too? I tried googling it but couldn’t find anything.
I agree Russia is more self-reliant, the people have already experienced a collapse and are much more ready, they have much more public transportation, and their resource use vs. population is 10x-50x better than the U.S. However they too will also eventually peak in their oil production, it’s not a question of if, it’s a question of when. It’s questionable if they’ll beat their old Soviet Production levels and especially if they’re able to maintain it.
I do also think coal is on it’s way out, it too is becoming less viable. The coal we get now is extremely poor quality compared to 100 years ago. Not to mention the diminishing returns are starting to crush people.
I’m really starting to think that in a geopolitical and resource the Soviet Union was probably the most blessed bloc in the world. Plenty of agricultural land and mining in Eastern Europe, oil, steel, and coal in Russia, rare earth minerals in Mongolia, and natural gas in the Caucasus. They weren’t nearly as wasteful, some arguments about they were inefficient, but at least they lived simply. In America it’s like a new issue every day, with toxicity coming from all walks of life.
makati1 on Mon, 5th Oct 2015 11:14 pm
James, it was in an article months ago, I think, and that is thousands of articles I have read since. My 70 year old brain recovery is not that good anymore. LOL
It was talking about the false idea that Russian oil production costs went up when the ruble devalued. That is a contradiction in terms when the cost to produce is priced in rubles, not dollars.
As an example: Construction laborers here make about P400 per day. When the Peso was strong at P42/1USD they made $9.52 per day. Now it is about P47/1USD and their pay is still P400/day, but it is equal to $8.51. If the Peso had devalued ~50% like the Ruble, it would be worth only $4.76. But the cost to produce that days labor would still be only P400, not P800.
Perhaps Americans tied totally to their USDs cannot understand the difference? Those who have actually lived outside the States do. It is/was part of their everyday finances, especially if their income was/is in USDs that had to be converted to the local currency.
BTW: That also relates to the price of oil. It may have dropped ~50% but the ~50% devaluation of the ruble balanced that out to an almost even wash. A barrel of oil still buys almost the same amount of stuff in Russia as it did before the drop. Am I wrong?
Davy on Tue, 6th Oct 2015 1:51 am
I love dog paw and tipper’s Russian fantasies. Maybe a closer look is due
Drunken Nation: Russia’s Depopulation Bomb
http://www.worldaffairsjournal.org/article/drunken-nation-russia%E2%80%99s-depopulation-bomb
The current Russian depopulation—which began in 1992 and shows no signs of abating
Second, unlike all the previous depopulations in Russia, this one has been taking place under what are, within the Russian context, basically orderly social and political circumstances.
The current crisis, on the other hand, is proceeding gradually and routinely, and thus it is impossible to predict when, or whether, it will finally come to an end.
A consortium headed by the World Health Organization estimated that for 2005 a woman’s risk of death in childbirth in Russia was over six times higher than in Germany or Switzerland.
Yet in post-Communist Russia, there are unambiguous indications of a worsening of social well-being for a significant proportion of the country’s children—in effect, a disinvestment in children in the face of a pronounced downward shift in national fertility patterns.
Life expectancy in the Russian Federation is actually lower today than it was a half century ago in the late 1950s. In fact, the country has pioneered a unique new profile of mass debilitation and foreshortened life previously unknown in all of human history.
Russia ranked 164 out of 226 globally in overall life expectancy. Russia is below Bolivia, South America’s poorest (and least healthy) country and lower than Iraq and India, but somewhat higher than Pakistan. For females, the Russian Federation life expectancy will not be as high as in Nicaragua, Morocco, or Egypt. For males, it will be in the same league as that of Cambodia, Ghana, and Eritrea.
The Russian Federation is afflicted with a serious HIV/AIDS epidemic;
Russia was experiencing about 150,000 new TB infections a year.
Russian population may well have been suffering the very highest incidence of mortality from diseases of the circulatory system that had ever been visited on a national population in the entire course of human history.
Russia’s patterns of death from injury and violence (by whatever provenance) are so extreme and brutal that they invite comparison only with the most tormented spots on the face of the planet today.
mind-numbing, stupefying binge drinking of hard spirits is an accepted norm in Russia and greatly increases the danger of fatal injury through falls, traffic accidents, violent confrontations, homicide, suicide, and so on. Further, extreme binge drinking (especially of hard spirits) is associated with stress on the cardiovascular system and heightened risk of CVD mortality.
As we have already seen, it is Russia’s death crisis that accounts for the entirety of the country’s population decline over the past decade and a half. The upsurge of illness and mortality, furthermore, has been disproportionately concentrated among men and women of working age—meaning that Russia’s labor force has been shrinking more rapidly than the population overall.
apneaman on Tue, 6th Oct 2015 2:27 am
Davy, I’m no fan of the Russians, but you might want to consider that it’s a sign of desperation to have to stoop to this neocon rag to get your shots in. In addition this particular piece is so fucking trashy it’s ridiculous. The guy who wrote it, Nicholas Eberstadt, is a political economist at the American Enterprise Institute – a neocon think tank. Get in bed with whoever you like, but if it’s with these guys then don’t call anyone a war monger again, because these cunts are the #1 1% war pigs mouthpiece. His source is UN projection numbers. Those right wingers are big fans of the UN all of the sudden eh? And it is almost 7 years old.
http://www.rightwingwatch.org/content/american-enterprise-institute
apneaman on Tue, 6th Oct 2015 2:38 am
How America’s “Think Tanks” are Compromised and Bought Off by Foreign Governments
http://libertyblitzkrieg.com/2015/10/02/how-americas-think-tanks-are-compromised-and-bought-off-by-foreign-governments/
apneaman on Tue, 6th Oct 2015 3:19 am
The neocon neoliberal shit is deep.
Rupert Murdoch: Propaganda Recruit
“Special Report: Journalistic objectivity was never high on Rupert Murdoch’s ethics list, but “secret” records from the 1980s show how far the media magnate went to ingratiate himself with President Reagan by collaborating with U.S. propaganda operations, reports Robert Parry.
By Robert Parry
In February 1983, global media magnate Rupert Murdoch volunteered to help the Reagan administration’s propaganda strategy for deploying U.S. mid-range nuclear missiles in Europe by using his newspapers to exacerbate public fears about the Soviet Union, according to a recently declassified “secret” letter.
Murdoch, then an Australian citizen with major newspaper holdings in Great Britain and some in the United States, had already established close political ties with British Conservative Prime Minister Margaret Thatcher and was developing them with President Ronald Reagan, partly through one of Murdoch’s lawyers, the infamous Red-baiter Roy Cohn, who had served as counsel to Sen. Joe McCarthy’s investigations in the 1950s.”
more
https://consortiumnews.com/2015/10/05/rupert-murdoch-propaganda-recruit/
Davy on Tue, 6th Oct 2015 3:48 am
You are correct Ape Man on the reference but you reference stinky sources too and glean info that is useful. The picture of Russia is valid. I only highlight it because others here that are incorrectly portraying Russians as supermen. This tarnishes our board.
Are we looking for the truth or painting a picture? I am actually fond of Russian history and culture. The same is true for China but not the current Chinese culture of excess and destruction. Unfortunately I have to call out these countries because of dog paw and others that want a winner looser dynamics. The dynamics of this board is you cannot be just critical of America. You must solidly against it and without criticism of her opponents.
I am not here for popularity. In fact I love the competition of being the underdog. It is energizing. America and being American is not cool now. We Americans are not popular but people respect us because we are dangerous. Don’t you think I would like to be respected for higher loftier reasons! I am trying to make America less dangerous in my own small way. On this board I want the criticism accurate. The same would be true if you were criticizing my kids if they were assholes. I am not perfect at this but I feel it important.
I am obsessive and a hard head. If I see shit I say it stinks. Maybe that is why we like each other Ape although we hate each other at times too. We have a relationship of respect because we are very similar. Believe me I hate being American in many ways. The place is crashing down around me. Being American is a stigma today globally especially among intellectuals. Yet, I will make sure some balance is maintained mostly in regards to the opponents of the US. They stink too just not as bad. Canada sucks a little too and you know it.