Iran is no longer a global geopolitical pariah. But to a lot of countries, Iran is still the kid at school that nobody likes.
As of a few days ago, Iran is no longer subject to economic sanctions that have been in place for decades. That means it’s about to be able to sell a lot more of its oil in global markets, which will further push down the price of oil – which has fallen 72% since 2014 highs.
That’s great for countries that are net importers of oil, like Singapore, Thailand, India, the Philippines and China. Lower oil prices mean stronger economic growth and lower inflation for these countries. But it’s bad for big oil producers like Brazil, Russia, Saudi Arabia and (to a lesser degree) Malaysia.
As the Financial Times explained yesterday, “Iran announced its full return to the global oil market by ordering an immediate increase in production, prompting warnings from fellow OPEC members that it risks prolonging the biggest price crash in a decade.
Brent crude, the international oil benchmark, fell below $28 a barrel for the first time since 2003, as Iranian tankers loaded with 50m barrels of crude prepared to set sail following the lifting of US and EU sanctions.
Marking the end of years of economic isolation, the head of Iran’s national oil company gave the instruction to increase output by about 500,000 barrels a day…”
As we explained, the price of oil has fallen because demand hasn’t grown as fast as supply. The amount of “extra” oil isn’t much – just about 2% more oil is being produced than there’s demand for. But that plays a big role in pushing down the price of oil. And with Iran about to add 0.5% to total daily oil production, there’s only going to be more oil. Yesterday the International Energy Agency said that oil markets could “drown in oversupply”.
Iran could help stem the fall in the price of oil by holding off on its plans to produce more oil. But it’s not going to. No one else is, for one thing, including OPEC, the former oil cartel that tried to guide price levels.
And Iran has three other very good reasons not to pump as much oil as it can:
- Iran needs money. Its infrastructure – roads, bridges, buildings – are in lousy shape. Some parts of the country look like they haven’t seen any investment in thirty years. Pollution is bad, and quickly getting worse. Iran’s economy has been shrinking, and its currency has been weak.
- Iran wants stuff. Rich, well-connected people have always been able to get what they want in Iran. When I visited Iran year and a half ago, stores were full of things made in China and Russia. But normal people in Iran haven’t been able to get the gadgets, clothing, household goods, food, and cars that the rest of the world takes for granted. Soon, at least some of that stuff will be available. But they’ll need money to buy it.
- Iran’s leaders want money. A 2013 investigation by Reuters found that Iran’s supreme leader, Ali Khamenei, controlled a business empire worth US$95 billion. Iran’s supreme leader is a unique mix of holy leader and authoritarian boss-for-life. He and the political structure that keeps him in power need to maintain their account balances. It’s corruption on a large scale, and oil is funding it all.
Iran has more oil than any country except Venezuela, Saudi Arabia and Canada. Iran has more oil than Iraq, and more oil than Kuwait and Libya put together. Pumping oil is the one thing Iran can do to easily and quickly make money.
Eventually, supply will equal demand in the oil market. But Iran’s additional oil production means that time will come a even later.