WUEG February 2016 Newsletter

whartonundergradenergy

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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