"For the OPEC economies, even the Arab Persian Gulf producers with large assets cushioned up in their sovereign wealth funds, the price at/or about $40 pb will have long-term negative macroeconomic consequences,” Sara Bazoobandi told the Tehran Times.
At a meeting in Vienna late last month Saudi Arabia blocked calls from some OPEC members to curtail oil production to arrest a slide in global prices.
Some analysts say Saudi Arabia opposed production cuts to put financial pressure on Iran, which its oil exports have already been reduced by half due to unilateral sanctions by the U.S. and European Union.
Mrs. Bazoobandi, whose core research interest is focused on Iran and (Persian) Gulf Cooperation Council countries, said, "The balance of power struggle in the region between the two countries (Iran and Saudi Arabia) has not helped their much-required united decisions within OPEC.”
Following is the text of the interview: Why couldn’t OPEC reach an agreement?
Various considerations mainly the fear of losing market share to non-OPEC producers has contributed to the recent decision of OPEC. Given the current production quota system and historical backgrounds in OPEC, Saudi Arabia has been a key player in the organization and the recent decision was influenced by this role. In other words, Saudi Arabia and other the three Persian Gulf Arab producers, did not consider the short-term fiscal pressure on other OPEC members with high breakeven prices in this decision. From the latest meeting, it seems there is a cartel (formed of Arab Producers of the Persian Gulf) created within cartel (OPEC) and this will likely widen the gap within the organization and can make the future decisions harder to reach. Can the decision serve the interests of OPEC in the long run by discouraging investment in shale oil?
The prices will certainly decrease further and stabilize at some point. When speaking about the price of oil, it is important to differentiate between break-even prices, the prices that investors consider when deciding whether to invest in new producing capacities, and shut-in prices, the price that existing operators consider for covering variable costs and if those costs are not covered, they will stop production from existing wells.
OPEC’s current decision is based on one assumption that lower break-even prices will reduce/slow down shale production. The U.S. shale break-even prices are estimated to be somewhere between $60 and $80 per barrel (pb). In reality however, what matters in the next few years for shale producers is the shut-in price, which falls below $40 pb. Therefore, existing shale production is likely to continue for sometimes even if prices stay low. For the OPEC economies, even the Arab Persian Gulf producers with large assets cushioned up in their sovereign wealth funds, the price at/or about $40 pb will have long-term negative macroeconomic consequences which will take them a long time to recover from. Is OPEC weaker now?
The world is consuming roughly about 90 million barrel of oil per day. The OPEC is producing one third of this amount. Therefore, the OPEC produced oil is still quite important to the global energy markets. Moreover, the Persian Gulf oil is much cheaper to produce than most of the other regions in the world. So, the importance of OPEC for the global energy supply has not declined. However, one can argue that the political power of OPEC has decreased mainly due to the rise of non-OPEC production. Iran is seeking a price increase outside OPEC. Can it really work?
I doubt there would be much scope for price increase without production cut in the short-term. I also doubt any non-OPEC producer will make any significant production cut which will be sufficient to boost the prices unless it is a unified global strategy by, at least, the major producers. In the current oil market climate, production reduction of one producer means, another producer will fill the gap in the market, simply because there is surplus supply of over a million barrel per day in the market. I equally doubt Iran make any drastic decision to drop out of OPEC in the short-term, as it would not be useful for Iran in any respect. Iran outside of the OPEC will not hold more power to boost the prices single handedly. Did the conflict of interests between Iran and Saudi Arabia cause a failure by OPEC to reduce oil production?
Oil has historically been a very politicized commodity; and Iran and Saudi Arabia has had their differences over oil policies within OPEC for the past decades. In addition, the balance of power struggle in the region between the two countries has not helped their much-required united decisions within OPEC. Saudi Arabia is the producer of one third of total OPEC productions; hence, it had traditionally held high decision-making power within the organization. The Saudi position with the GCC countries also encourages Saudi Arabia’s aspiration to take a leadership role within OPEC.
As a result, Iran has often sought to lobby with non-GCC producers of OPEC to offset the Saudi influence. Having said that, it would be wrong to assume these two countries make all the decisions of OPEC or the difficulties and internal disputes within OPEC are only as a result of the conflict of interest between Iranians and Saudis.
After all, oil is a highly political commodity and there are complex factors at the global level, which affect the markets. Can the extension of nuclear talks between Iran and 5+1 group have any effect on the sanctions regime on Iran?
Iran’s oil production and export have significantly declined as a result of the toughened sanctions. In addition, the sanctions worsened Iran’s structural economic issues. Therefore, any extension of the negotiations and delay in lifting the sanctions will have continued negative impact on the Iranian economy. This combined with lower oil prices would only pose a bigger impact on Iran. The $700 million per month payments to Iran from its frozen assets (which is almost equal to selling of 300,000 barrel of oil a day at price of $70pb) will provide some assistance for the Iranian government’s liabilities. But such measures will surely not be sustainable.
Would foreigners be eager to invest in Iran’s oil and gas industries during this time?
The sanctions are probably by far a bigger threat to the future of foreign investment in Iran’s oil and gas sector. Lifting the sanctions will take long even if, and when, a deal is reached. From an investment perspective, given the low cost of production for Iranian oil, and increasing importance of gas as a strategic commodity both to Europe and Asia, Iran will be financially a desirable investment destination. However, there are other internal factors, which make it difficult for the foreign investors to entre Iran. The difficulty of doing business in Iran and the heavy government involvement in the economy, are amongst such factors.