WUEG February 2016 Newsletter

February 2016
to a rate still $1.25 more expensive than Iranian
heavy crude. While some speculators are bracing
for an increase in the crude supply glut and ruinous
price competition, it is uncertain whether Iran’s
tactics will be impactful and sustainable.
Considering the sheer magnitude of oil production
among OPEC member states, Iran’s goals to
increase production will have relatively little
significance in global commodity markets. In
January 2016, OPEC producers maintained an
output rate of 32.33 million barrels per day, with
Saudi Arabia leading production. As OPEC’s fifthlargest
producer, Iran simply does not have the
output capacity to flood the market at a level
commensurate to Saudi Arabia’s recent behavior.
Iran’s domestic energy needs raise further
questions about the sustainability of its oil export
boost. Iran currently imports 10 million liters of
gasoline daily and has frequently reduced natural
gas exports to meet domestic demand. If Iran
continues to depend on foreign refineries for a
large portion of its consumption while exporting
large quantities of crude, the country will pay more
for its energy than if it kept and refined the oil at
home.
While cheap oil exports will clearly take their toll
on the success of Iran’s energy industry, the
nation’s substantial growth relative to sanction-era
levels may provide sufficient impetus to continue
down this path. After having its production stifled
under economic sanctions, Iran will likely
experience between 4 and 5.5 percent GDP growth
this year in large part due to its chance to step up
output.
Even if Iran were to pose a serious threat to the
already precarious state of global oil markets, the
nation simply may not be able to maintain its
cheap export prices for very long. While Saudi
Arabia has been able to keep up its excessive
production thanks to ample national reserves, Iran
lacks such a safety net. As Iran’s reserves are
depleted, the country will be forced to increase its
oil export prices and let Saudi Arabia win the
ongoing price war.
These conflicting forces—the faulty economics of
Iran’s cheap exports and the boost from an
overnight increase in production—make the future
of Iran’s energy industry uncertain. For the time
being, the country will most likely be willing to
take a financial hit if it means regaining a foothold
in the global oil market, but it is uncertain how
long the tradeoff will remain worthwhile.
Sources:
Financial Times
Al Jazeera
New York Times
Bloomberg
Saudi Arabia, Russia Meet to Discuss Production Freeze
Sheetal Akole – VP, Academic Committee
Saudi Arabia and Russia met in Qatar earlier this
month to discuss potential cutbacks in oil
production in an attempt to stabilize oil prices
after they have slid over 70% in the last 18 months.
The two countries reached an agreement to freeze
their oil outputs at January 2016 levels. This
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