Iran effectively shut down the Organization of Petroleum Exporting Countries’s (OPEC) latest attempt to limit oil production to increase prices Tuesday, announcing it wouldn’t make a deal until its place in the global oil market was restored.
Iran announced that it won’t be joining any deal until it hits oil production targets, effectively sinking a planned OPEC conference in September before it begins. The announcement will certainly worsen the already bad relationship between Saudi Arabia and Iran, likely making their foreign policies desperate and even more aggressive while undermining the economies of OPEC nations.
“With oil prices remaining low for the foreseeable future and Iran possibly having a harder time getting to its production targets, in the long run the calculus about a freeze may begin to shift. But for now, Iran’s position is no surprise,” John Allen Gay, managing editor of The National Interest and coauthor of a book on war with Iran, told The Daily Caller News Foundation.
In April, Iran refused to join the rest of OPEC and Russia in an agreement to limit oil production to raise the price of oil. Iran’s oil officials said that, before considering cooperation, their production had to rise to between four million and 4.2 million barrels a day. Iran has repeatedly said it is unwilling to accept any freeze in production, until it regains the market share it lost during years of economic sanctions over the country’s nuclear program.
Saudi Arabia and other Arab countries have repeatedly refused to make any deal to reduce oil output without Iran involved. “Iran has to be there or there will be no freeze,” one OPEC delegate in the region told The Wall Street Journal Tuesday.
“Iran’s stated policy for some time has been to restore its pre-sanctions oil production levels before it will negotiate a freeze,” Gay told TheDCNF. “Since it’s still several hundred thousand barrels a day short of that target, it’s no surprise that they aren’t about to play ball with the Saudis on a freeze.”
Oil industry analysts told The Journal after a previous failure to make a deal that the price of oil fell from $46.47 per barrel to $30 a barrel within days.
Gay suspects that domestic political concerns in Iran are to blame for the country’s refusal to make a deal with the Saudis. “Iran’s President Hassan Rouhani is also up for reelection in less than a year, and is facing pressure from hardline critics to show that his economic programs and particularly the nuclear deal have produced a positive impact. Boosting oil production is one way to do that.”
Iran hasn’t produced much oil after seriously under-investing in its oil sector for years due to sanctions. Simply restoring previous oil production levels is estimated to require a minimum $150 billion of new investment, and could cost Iran up to $500 billion over the next five years, according to reports by the country’s state-run news agency. Iran desperately needs the kind of quick cash that only selling oil on the global market can provide.
“The internal politics of oil production are very complicated: first, with entities linked to the Revolutionary Guards still facing sanctions and dual-nationality businesspeople like Siamak Namazi facing arbitrary arrest and detention,” Gay told TheDCNF. “Iran is a risky climate for investment; second, foreign investment in Iranian oil has been a subject of intense political controversy there for more than sixty years.”
Diplomatic tensions between Saudi Arabia and Iran have also made a deal much less likely, as both countries are battling for oil market share. Saudi Arabia and three other Sunni nations cut diplomatic ties with Iran in January. The Saudis banned ships carrying Iranian crude oil from entering the country’s waters or utilizing its infrastructure in April, making Iran more unwilling to cooperate. The Saudis have threatened to increase production by up to a million barrels a day — which would vastly lower the price of oil — simply to hurt Iran.
If the price of oil remains low it could be devastating to OPEC nations and Russia. Historically low oil prices caused the Russian economy to contract by 3.7 percent in 2015. The country’s economy will keep shrinking unless oil prices recover to at least $80 per barrel, according to the Energy Research Institute of the Russian Academy of Sciences.
Other major OPEC nations have also been devastated by cheap oil. Venezuela has been forced to import oil from America, and faces total economic and social collapse.
Saudi Arabia can likely handle cheap oil better than other OPEC countries, but even it is expecting a budget deficit of $140 billion — roughly 20 percent of the Saudi economy. When compared to 2013’s surplus of $48 billion, the fiscal outlook for the Kingdom looks so dire the International Monetary Fund warned it could go through its fiscal reserves within five years. Saudi oil export revenues dropped 46 percent in just the last year and the country is selling bonds for the first time since 2007.
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