THE UNITED STATES, France, Germany, Russia, China, and the United Kingdom have reached an agreement with Iran over its nuclear development program. The deal basically will lift the economic sanctions on Iran that have been in place for years, which will allow Iran to again begin exporting oil in large quantities. In return, Iran agrees to curtail its development of nuclear energy, which it insists are only for peaceful purposes. It will allow some inspections and visits by outside nations in an effort to determine if Iran is living up to its end of the bargain.
The UN Security Council has unanimously endorsed the agreement, and the US Congress will also have to review the deal, which is a political football, coming as it does as the 2016 election campaign is starting to heat up. Most insiders think the issue will be hotly debated, but that Republicans don't have the votes to reject the deal, which was negotiated by a US team led by Secretary of State John Kerry and Secretary of Energy Ernest Moniz. President Obama has said he will veto any attempt by Congress to keep the agreement from going into effect.
Without getting into further details, it appears the agreement is something we will all have to live with. History will judge its effectiveness in preventing Iran from developing a nuclear weapons capability.
Since this is nearly a done deal, let's take a look at the likely impact the lifting of sanctions will have on Iranian oil exports and how this might affect global oil prices. And, aside from oil price considerations, is there any good news for American and Western oil interests?
A short background: Iran is the second-largest oil producer in the Middle East after Saudi Arabia. It holds the world's fourth-largest crude oil reserves and the world's second-largest natural gas reserves. Despite the country's abundant reserves, Iran's crude oil production has substantially declined, and natural gas production growth has been slower than expected over the past few years. International sanctions have profoundly affected Iran's energy sector and have prompted a number of cancellations or delays of upstream oil and gas projects.
Sanctions against Iranian exports have caused the Islamic Republic's oil exports to fall from 2.5 million barrels per day in 2011 to about 1 million bpd today. Pressure from the US on other nations has succeeded in reducing the number of countries Iran was selling oil to from 20 down to just six. Even those six - China, Taiwan, Japan, South Korea, India, and Turkey - had lowered the amount of oil they imported from Iran. With the world currently awash in cheap oil, this wasn't a difficult decision for them.
The weakness in benchmark prices reflects the already oversupplied global crude oil market. This is due to slower growth in demand for oil products internationally and from a robust growth in supply from non-OPEC sources, mainly in the US. Although the US doesn't export crude oil, domestic production has enabled US refiners to reduce imports from foreign sources, so this crude then goes on the global market.
Saudi Arabia, the leading oil exporter, has declined to reduce production in order to bolster prices as the kingdom has done in the past. In fact, despite weak prices, Saudi Arabia has been adding supplies to the market with the intent of maintaining the country's dominant position among oil exporters.
It's easy to see that adding additional Iranian oil exports to the current global market will have a negative impact on prices. The only question is how long it will take for Iran to ramp up its production and export capacity.
Iran recently outlined plans for the rebuilding of its core industries in the wake of the nuclear pact with world powers, adding that it is targeting oil and gas projects valued at $185 billion by 2020. Many European nations have already indicated interest in reestablishing business ties with Iran, and other investors have been granted licenses and protections to help rebuild Iranian infrastructure. These investors see a wealth of opportunity in production optimization and enhanced recovery projects in Iran once the sanctions are lifted, probably sometime next year.
Although this may be good news for some engineering and construction firms, the prospect of adding one million new barrels of Iranian oil per day to the world market is disheartening to American producers.
On July 14, the IPAA issued a statement on the Iran agreement: "The deal will soon put America's oil producers at a competitive disadvantage in the global marketplace. As soon as Iran is permitted to export its surplus oil on the world market, why can't we allow our own companies to do the same with their American-made surplus of crude oil? It's an action that would lower gasoline prices for American consumers while positioning the United States more powerfully in the international energy arena…The 1970s era ban on crude exports makes no sense for a nation that has surpassed Saudi Arabia and Russia as the world's leading oil producer."
For once, the US government should listen to its own oil and natural gas producers, who are just asking that the playing field be level.