Iran: the forbidden fruit (yet again) of the world market

Iran: the forbidden fruit (yet again) of the world market

Marcello Vallese
The country holding the world's fourth largest oil reserves is trying to regain a sunny spot in the world's energy markets, grappling with an endless feud, past sanctions and the need for a technological update to effectively tackle rising production costs

The embers buried under the ashes left by last April’s failed Doha meeting are still sweltering and a slight gust would be enough to fuel a bonfire of cascading problems that could potentially wreak havoc on the global oil markets. The battlefield is OPEC and the feud sees the same old contenders: Saudi Arabia on one side and Iran on the other. In April the world looked at the Doha OPEC conference with a mixture of hope and scepticism, in the hope that cartel members to would enact a production freeze to put a stop to the oil price drop, which plummeted in less than 2 years from a $115 high to a $27 all-time low in late January. Hope turned to scepticism when Saudi prince bin Salman declared that an agreement would be reached only through a unanimous green light from OPEC members, including Iran. Unfazed, Teheran simply did not go along with the Saudi proposal and refused to attend, publicly declaring its need to boost production up to pre-sanctions levels. To this day, the oil market is still quite a turbulent and dynamic milieu, subject to destabilising factors, some hardly predictable. Just like the mammoth wildfires in Alberta that knocked out a whopping 1 million barrels a day in Canadian production, or the persisting instability of such top-notch producers like Venezuela and Nigeria, not to mention the Lybian conundrum. All this has lead to a rapid erosion of a 2 million barrel excess in production causing prices to rise, now at $50 a barrel. In the midst of such uncertainty, the full potential of Iran’s post-sanctions oil production to the world stage should be enough to balance the market and favor the likelihood of a positive outcome of OPEC’s next meeting scheduled for June 2.

Future prospects for oil production

"I do not expect anything from OPEC, except disagreements. Iran and Saudi Arabia are mortal enemies and will remain so." These words from Fadel Gheit, Senior Energy Strategist of Oppenheimer Investment Bank, leave little hope on the outcome of the next meeting. "Iran is unlikely to agree to production freeze since its current production is well below its OPEC agreed quota. Iran is likely to increase production by more than 1 million barrels from current levels and lifting the economic sanctions could allow it to sharply increase production by more than 2 million barrels in the next 2-3 years." And on the Saudi-Iranian rivalry, Gheit affirms that: "they are the world's lowest cost producers and can outlast others at lower oil prices for longer." But  Gheit’s remarks strike an ominous resemblance to the introduction of this piece, they both, and the rest of the oil producers need much higher oil prices to meet their government spending,  or be faced with political upheaval and even regime change." Looking at the bright side of the picture, one must consider Iran’s rosy economic outlook painted by the International Monetary Fund with a predicted 4% GDP growth until 2021 with an even more optimistic take from the World Bank, betting on a 6% growth until 2017. The effects of such growth rates on Iran’s oil production are eloquently outlined by Gheit: "If Iran gives attractive financial incentives it could attract foreign capital and technology and possibly double its production in the next 5-7 years."

Sanctions are still an unresolved problem

If the immense renewable energy potential the country is about to unlock with numerous European and Asian partners were added to the equation, Iran’s outlook would definitely look sunny. Unfortunately, dark clouds that could shadow Iran’s growth prospects still loom on the horizon. Not the recently revoked sanctions on the fledgling nuclear programme, but rather the ones linked to Iran’s conjectured terrorist activities. American Secretary of State John Kerry recently met with a pool of top European bankers urging them to do business with Iran, recommending that it be "legitimate". The only major question mark lands on the ability of European Banks to reliably determine whether an Iranian company is linked in some way to the Islamic Revolutionary Guard Corps, an ubiquitous presence in Iran’s economy and still considered by the US a terrorist organization. To add some extra murkiness to the scenario comes the US dollar as the established currency of all commercial transactions, oil included, meaning that any European bank is obliged to transit through the American banking system. This explains the hurdles traders and Western oil companies must overcome to access Iranian crude, paving the way for China and India. With this sword of Damocles hanging over its economic growth prospects, Iran is called to address the push for change brought by a growing young populace, the on-going political arm wrestling between reformists and hard-liners and the international community, that looks towards the Middle-Eastern country as the great last untapped market.