Impact of Lifting Iran’s Sanctions on Global Oil Prices
Oil is at the heart of Iran’s nuclear programme. Iran needs nuclear energy to replace the crude oil and natural gas currently being used to generate electricity, thus allowing more oil and gas to be exported. Without nuclear power, Iran could be relegated to the ranks of small exporters by 2020 with catastrophic implications for its economy and also the price of oil.
Iran would doubtless not be averse to possessing nuclear weapons. There is an element of security and also logic involved with Iran’s quest for nuclear weapons. Even the recent nuclear agreement will not shift Iran an iota from its determination to acquire nuclear weapons.
Their logic is that if Israel, India, Pakistan and North Korea can defy the world and get away with it, why not Iran. Neither sanctions nor the threat of war have managed to persuade Iran to relinquish its nuclear programme and its pursuit of nuclear weapons. The final nuclear deal only delays probably by a few years the day when Iran acquires nuclear weapons. Iran is determined to acquire nuclear weapons and will face down the United States, the European Union, Israel and the world community and will get away with acquiring nuclear weapons. The US and its allies can do nothing militarily, economically or with sanctions. It is even possible that the US and its allies including Israel would eventually end up acquiescing to a nuclear Iran and who knows, they might even end up forming an unholy alliance made up of the US, Israel and Iran to siphon off the oil and energy resources of the Arab gulf countries.
From a peak production of 6 million barrels a day (mbd) and crude oil exports of 5.7 mbd in 1974, Iran in 2014 was struggling even to produce 3.15 mbd with net exports down to 1.00 mbd. And if the current trend continues, Iran could cease to remain an oil exporter altogether by 2030. Iran has not managed since 2000 to achieve its OPEC production quota of 4 mbd.
The decline in Iran’s oil exports over the last few years was not solely due to tighter sanctions but mainly to fast-depleting old oilfields whose reservoirs were damaged in the 1970s from excessive production under the Shah. Since then Iran has never had the chance to repair its damaged oil industry what with war with Iraq from 1980-1988 followed by stringent sanctions because of its nuclear programme.
Given the problems in its oilfields, nuclear energy will enable Iran to replace 93% of the oil and gas, or an estimated 1 mbd, used in electricity generation by 2020. Based on these figures, Iran’s quest for nuclear energy seems justifiable.
Iran’s final nuclear deal will eventually lead to the lifting of almost all the international sanctions against it within a few months. This means that Iran could in the fullness of time be able to attract badly-needed foreign investment and import advanced Western oil & gas technology such as enhanced oil recovery (EOR) needed to repair the damage at its reservoirs and raise crude oil production. However, this could take at least 3-5 years to achieve according to Dr Fatih Birol, chief economist at the International Energy Agency (IEA) in Paris. Even then it might only succeed in limiting the fast depletion in its oilfields rather than increasing production.
Moreover, given current market conditions, only limited international investment will likely be available to help increase Iran’s production. At today's oil prices, investors are cutting back everywhere. Iran needs $200 bn of investments in its oil and gas industry.
Global investment in oil upstream will go down this year by 20% which is more than $100 bn mainly in the United States, Brazil and Canada due to low oil prices. Major oil & gas companies are also concerned about investing money due to the simmering geopolitical tensions, especially in the Middle East and the Ukraine. The economic crisis in Europe is another reason for the investors to be wary of reconsidering their decision to park their money in troubled regions.
Early this year, the world’s largest Oil Service companies – Schlumberger, Halliburton and Baker Hughes – reported that spending by their customers dropped by 25%-30% in the US compared with 10%-15% in other parts of the world. Such realities cast major doubt on Iranian oil minister Bijan Zanganeh's recent claim that if sanctions were to end, "Iran will double its oil exports within two months.“ He says Iran has produced 2.78 mbd in April this year and this would reach 3.8 mbd by the end of this year and 4.8 mbd by June 2016. This means that Iran only exported 756,000 barrels of oil a day (b/d) in April 2015, down from 1.0 mbd in 2014, according to the Iranian oil minister’s own figures.
I estimate Iran could add no more than 300,000-500,000 b/d a day to its production but even this may not translate into added exports because of the steeply-rising domestic consumption. Moreover, Dr Fatih Birol says that extra oil production from Iran may not reach the markets in the next couple of years.
As a result, lifting the sanctions against Iran will hardly affect the global oil prices or the global oil market in the long-term. Any initial impact could be the result of Iran releasing some of its alleged stored crude oil on tankers or floating containers to the market, but the impact will be short-lived and very limited. However, Iran might benefit from the development of its huge natural gas reserves.
With technology and investments Iran could substantially raise its natural gas production and export a sizeable amount of it to Europe in the form of natural gas and LNG thus competing directly with Russian gas supplies to Europe and with Qatar’s LNG exports.
And whilst lifting the sanctions on Iran will facilitate its efforts to remedy its ailing oil industry, raising its crude oil production and exports would in the future be influenced by factors beyond Iran’s control such as the glut in the global oil market and the curtailment of global investments resulting from the current low oil prices” as well as geological factors.
*Dr Mamdouh G. Salameh is an international oil economist, a consultant to the World Bank in Washington DC on oil & energy and a technical expert of the United Nations Industrial Development Organization (UNIDO) in Vienna. He is also a visiting professor of energy economics at ESCP Europe Business School in London.
The views and opinions expressed in this article are those of the author and do not necessarily reflect the position of ESCP Europe Business School.