The nuclear dispute between Iran and the six world powers, known as the Group 5 + 1 (U.S., Russia, China, United Kingdom, France and Germany), has concluded last July 14th in an historical and international agreement in Vienna. This event will modify many political and economic equations around the world.
The agreement includes a lifting of the economic sanctions imposed by the UN to Iran on the country’s oil exports in 2006.
The United Nations will start checking by December that the first steps of the nuclear program dismantling are done. This implies that the arrival of Iranian oil to the market will not happen, as soon, until mid-2016.
Iran in the Global market
Iran had a GDP of 818.000 million dollars in 2014, almost 2% of world economy. On the other hand, his counterpart in the nuclear program negotiations whole two-thirds of the 74 billion of the global economy dollars.
Iran, among other countries in the region, has serious advantages. Iran, with an area of 1.6 million square kilometers – almost triples Spain – is located in the strategic Middle East region. The plateau of Iran is located in the Caspian Sea and the Persian Gulf area, a region that presents 70% of the world oil and gas. Its location has favored the country opportunity to export oil to diverse countries: United States, Japan, China, Europe and Southeast Asian countries. Besides, the Strait of Hormuz is considered one of the main international maritime strategic routes which allow 25% of the oil needed in the worlds to transit (nearly 17 million barrels per day).
The region has large oil reserves; it holds 10% of world reserves. On the other hand, it produces 20% of the global gas. The high potential for oil and gas in Iran and its infrastructures have turned the country into anattractive place for foreign investments. The level of risk is quite low and the costs for companies too which it has aroused the interest of Western oil companies.
Elements that affect the oil supply from the main producers:
Saudi Arabia: Has increased its production to reach 10.5 million barrels per day. The increase in production shows its determination to defend the OPEP market share over non-conventional producers, such as United States oil shale drillers and other competitive sources of supply.
United States: US live an oil boom. In 2014 U.S. production rose by 1.6 million barrels per day and reached11.6 million barrels per day. Hydraulic fracturing method, known as the shale technique, allowed them to meet 90% of its energy needs. The U.S.A oil industry rise implies that another “swing producer” has born in addition to Saudi Arabia, which benefit to the global market.
Russia: Oil and gas revenue make up half the government’s income. Russian has increased its GDP as well as its government revenue thanks to the rise in oil prices experienced before 2014. Nowadays the oil price tendency has strongly changed: Russia’s economy is projected to shrink by 3.4% this year. Moreover, revenues for Gazprom, the national gas giant, are estimated to fall by almost 30% this year.
Iran: Despite the initial windfall that Tehran will get from the relaxation of international sanctions, it is a dysfunctional government, like most petro-states. In fact, the International Monetary Fund estimates that Iran needs oil prices to be almost 100 dollars per barrel to balance its budget. In the medium term, it will face pressures just like the others.
Iraq: Oil makes up about 90% of the Baghdad government’s revenue, and despite the fact that it is pumping out as much as possible, it faces a massive drop in available funds. With limited resources, the Shiite government in Baghdad is hard-pressed to make patronage payments to the Sunnis. Next up, a major confrontation between the Kurds and the central government over the sharing of oil revenue will bring more instability to the country.
Venezuela: Nicolas Maduro, has inherited a bankrupt country that will not be able to service its debts. Oil makes up 96% of Venezuela’s exports. Its economy is estimated to shrink by 7% this year, having already contracted by 4% last year.
What are the implications on oil prices with the lifting of the sanctions?
Iranian Oil Minister Bijan Namdar Zanganeh says the country can increase exports by 500.000 barrels a day as soon as sanctions are lifted and an additional 500.000 a day in the following six months. Currently, Iran produced an average of 2.8 million barrels a day this year.
In this way, the oil market, with a supply that excesses the demand, would have to re-adjust the price downward. The news about the agreement has generated a wave of expectations about the possibility thatIran will become a source of additional power in an over-supply market.
A primary reason for the accelerated price decline is that Saudi Arabia, the world’s “swing supplier” that can most easily increase or decrease production, has decided to keep pumping. The Saudis know it hurts them but they hope it will hurt everyone else more. One of Saudi Arabia’s main aims is to put down U.S. producers of shale and tight oil out of business. So far, it has not worked. Though battered by plunging prices, U.S. firms have used technology and smart business practices to stay afloat.
So far, we are witnessing a historic fall in the oil price, down more than 50% in less than a year. When a similar drop happened in the 1980s, the Soviet Union collapsed.
Sonia Díaz | Energy Consultant