Watching Government: The Iranian oil question

Dec. 17, 2012
From the outset, the discussion's question seemed provocative: Can the world live without Iranian oil? Panelists at the Dec. 5 event at the Atlantic Council agreed that global prices haven't shot up because the country's production has fallen so far in recent years.

From the outset, the discussion's question seemed provocative: Can the world live without Iranian oil? Panelists at the Dec. 5 event at the Atlantic Council agreed that global prices haven't shot up because the country's production has fallen so far in recent years. But the full answer—not too surprisingly—was much more elusive.

Economic sanctions have substantially hurt Iran's oil operations, noted Sara Vakhshouri, president of SVB Energy International, an information technology company, who grew up in Iran. The country's entire energy sector lacks investments and technology, she maintained. "Without this, it will be hard for Iran to recover the production it has lost," she said.

Last summer, the Congressional Research Service predicted that Iran's production would fall to 3.3 million b/d by 2015, according to Barbara Slavin, an Atlantic Council senior fellow and the panel's moderator. "It's already happened," she said. "Iraq's, meanwhile, is increasing."

Iran may have a more highly educated workforce than its neighbors, but government bureaucracy and growing domestic demand undermine efforts to exploit the world's fourth largest proved reserves, Vakhshouri said.

"I don't think Iran's production can drop below 800,000-1 million b/d," she said. "Countries aren't using as much energy. There's also a union of customers against Iran which want US State Department waivers. They're trying to push for discounts, but Iran is resisting."

Vakhshouri acknowledged that growing unconventional production from US tight oil formations is affecting global markets and pushing prices lower. It costs $50-65/bbl to produce US Bakken crude, "but if prices drop below $70/bbl, around 20% of the expected resources worldwide won't be developed," she said.

The Iraq factor

Iraq remains Iran's biggest rival, but has problems of its own, observed Denise Natali, who holds the Minerva Chair at the National Defense University's Institute of National Strategic Studies.

"Its energy potential is tied to its political trajectory," she said. "There is no continuously upward production path. There is massive infrastructure damage after decades of war."

Iraq's export pipeline capacity is limited, Natali said. She suggested that Baghdad is playing a risky game by emphasizing the country's southern resources, where produced crude must go through the Strait of Hormuz, instead of those in the north, where production could head west to the Mediterranean.

Iran can't simply count on Iraq's not being able to overcome its challenges if it expects to regain its global customers, Vakhshouri said. It needs to curb its domestic demand, and reform its leasing and investment regimes, she maintained.

Most of all, it needs to get the sanctions removed. "Surprisingly, Iran has survived by exporting only 800,000 b/d—not well, but it has survived," Vakhshouri said.