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Economy Jan 9, 2014

How Iran deal may bring down oil prices, cut Saudi Arabia to size

By Rajeev Sharma

The Iran-US bonhomie may be bad news for traditional Iran-baiters like Saudi Arabia and Israel, but it certainly is good news for oil-importing developing countries like India and China as international oil prices are unlikely to see major spikes and may even go southwards if Iran has its way.

Apart from Iran, countries like Iraq and Libya too are bent upon roiling the Opec politics and challenge the dominance of Saudi Arabia in consistently keeping the international oil prices above $100 per barrel. The Indian basket has been ruling around the $104-$110 mark.

However, for India just a decrease in international oil prices alone will not be sufficient for cheaper oil as the Indian government will have to be wary of the rupee's volatility and hope that the international market forces' dynamics is such that the rupee does not weaken further. The petrol price hike a few days ago was necessitated more because of the weakening rupee despite marginal decline in international oil prices.

The logo of the Opec (Organization of the Petroleum Exporting Countries) is seen at the organization's headquarter in Vienna. AFP

The logo of the Opec (Organization of the Petroleum Exporting Countries) is seen at the organization's headquarter in Vienna. AFP

Iran, which lost $80 billion in oil revenues since 2012 because of the Western sanctions, has bounced back into the thick of politics of oil and is determined to make good its loss. Iran is determined to give its rivals (read Saudi Arabia) the run for their money by swamping the global oil markets with increased production even if the oil prices were to have a free fall.

At the last meeting of Opec in Vienna a little over a month ago, the Iranian and the Libyan oil ministers made right noises which should be music to the ears of major oil importers like India. In fact, Iranian oil minister Bijan Zangeneh went to the extent of saying that said Iran continue to increase its oil output even if the prices were to crash to $20 per barrel.

Though Zangeneh's remark should be seen as rhetorical in nature and it is well nigh impossible that world oil prices would plummet to such unthinkable lows, he has already unleashed the proverbial cat among the pigeons.

Libyan oil minister Abdel Bari-Al-Arousi too rocked the cartel and its uncrowned king Saudi Arabia by saying thus: "Somebody took our share of the market and it should be back." Clearly, the Libyan minister was referring to the windfall gains reaped by the Saudis and other Opec members by high oil prices, mainly due to saber rattling between Iran and the P5 + 1 in last few years.

This triggers the obvious question: why haven't international oil prices come down drastically even after the declared intentions of Iran, Iraq and Libya to increase their respective output? Why international oil prices continue to rule at well over $100 per barrel despite Iran's pledge to produce four million barrels daily, cocking the snook to the Opec which has capped the daily oil production at three million barrels?

The answer is not far to seek. The devil lies in Iran's poor infrastructure which has been badly hit by years of crippling sanctions. Added to this is the overriding security concern, an issue which is yet to be sorted out.

Iraq's story too is not very different from Iran as Baghdad is as badly bogged down with security risks and infrastructure bottlenecks as Iran is. The case of Libya is even far worse as it is a country highly riven among various militias.

Saudi Arabia has been the sole decision-maker for years in determining the world oil prices and has been increasing and decreasing its daily output at will, without bothering about the Opec's set rules of business. In the past two years, for example, there have been many occasion when Saudi Arabia took its output to above a record 10 million bpd, mainly under Western pressure to prevent the prices from rising too high.

But this monopoly of the Saudis is going to be challenged with the emergence of Iran on the world scene following Iran's game-changer agreement, though interim, with P5 +1 over its nuclear programme in November last.

Coupled with all this is another parallel ongoing narrative - the American shale revolution which is set to make the US the world's biggest oil producer by next year. Russia and China too have their own shale stories in the making.

It is not as if the world should prepare to write Opec's obituary. Oil experts have forecast 2014 to be a stable year for international oil markets and do not see any dramatic bloodbath in the cartel. Nor do these experts see the possibility of Opec's era of global oil policeman coming to an end anytime soon.

But what these oil experts have not taken into account is the possibility of some flamboyant politics of oil from countries like Iran, though it is a Herculean task for the Iranians to walk their talk. But you never know in politics.

Politics, after all, does change economics too.

The writer is a FirstPost columnist and a strategic analyst who tweets @Kishkindha.

by Rajeev Sharma

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