In 2018, when the US banned imports of Iranian oil and gave waivers to eight countries, oil prices started to come down and the Saudis felt cheated.
By Bhamy V Shenoy
No international oil experts have been able to predict with any degree of confidence the impact of the USending all waivers to import of Iranian oil by countries. Analysts were expecting a price increase of around $10 per barrel as a result of the waivers ending, with Brent price fluctuating between $60/barrel and $75/barrel. Very few have predicted prices going close to $100/barrel or above. Philip Verleger, an oil sector veteran, has predicted that Brent could rise to between $114/barrel and $126/barrel. His prediction used a model developed and based on 19 market disruptions between 1973 and 2018. All such models developed by academicians perfectly “predict” the old events. But, their accuracy of predicting future events has always been doubtful. Surprisingly, the media still gave wide coverage to Verleger’s prediction.
In 2018, when the US banned imports of Iranian oil and gave waivers to eight countries, oil prices started to come down and the Saudis felt cheated. They were expecting Trump to reduce Iranian export to zero. As the de facto leader of the OPEC, Saudi Arabia had convinced OPEC to drop production quota.
In 2019, while ending all waivers, Trump announced that Saudi Arabia, the UAE and the OPEC have assured him of increasing production to lower the oil price. But, all of them publicly contradicted him by stating that they did not promise either to drop the OPEC’s policy of imposing quota or to reduce price. In fact, the OPEC is seriously planning to extend the quota till the end of 2019.
Saudi Arabia says it agreed only to ensure supply and demand will be balanced, and no assurances were given on increasing production to bring down the price. On the other hand, Iran has threatened that any action on part of OPEC members to increase production to compensate for any loss from the US sanctions will result in the collapse of OPEC.
Ever since Trump’s decision to not extend the waivers, there has been questionable,and even fake, news reportage on the oil market. Did Trump really get an assurance from OPEC on increase of production as he has claimed? There hasn’t been any reliable information on Iran’s oil production or the impact Trump’s sanction will have on Iran’s export. Already, there are observations that Iran knows how to work around the sanction and its exports will never sink to zero. Similarly, there were all kinds of rumours about how countries like China, India, and Turkey, most affected by sanctions, may or may not comply with the sanctions. China has lodged a strong complaint that its energy imports from Iran are within the framework of international law and the US must respect it.
When the market was trying to digest the “fake” news on Iranian oil exports, Venezuela’s political situation worsened. Its production has plummeted from a high of 2.5 million barrels per day (mmbd) in 2015 to less than 0.9 mmbd. Trump had embargoed any oil import from Venezuela into the US since January of this year to bring down Maduro’s regime. Libya’s civic unrest was reaching a climax that could disrupt its production any day. In short, there is some possibility of the oil market losing as much as 3 mmbd while OPEC’s spare capacity is only about 2.8 mmbd. Thus, there is a distinct possibility of the oil market being hit by a perfect storm with production in Iran, Libya and Venezuela disrupted. Despite such a scary scenario, oil prices were moving within a short band of about $5 per barrel. During earlier price shocks, a lower oil production disruption has caused prices to jump by as much as 50% -over-100%.
Russia, a major player in OPEC+ to adapt production quota, hasn’t made clear whether it will assist ally Iran, further adding to the uncertainty. Though India knew that Trump may not extend the waiver after May 2, it failed to develop robust contingency plans to face the possible supply/demand scenarios. But, as discussed, oil supply can become even worse. The government did not state explicitly if it will accept the unilateral sanction of the US and stop imports from Iran, or whether India will face the consequences of charting its own foreign policy which will, in the long run, help the country. India’s historic ties with Iran are deep-rooted. In recent years, India has also been in the process of developing closer economic ties with Iran. Construction of the Chabahar port to facilitate trade between Central Asia and the Indian Ocean is one such project. In the oil sector, India could develop much better ties with bold, innovative moves. Iran has incentivised purchase of its oil with much better trade-terms to India.
The fundamental question that has not been asked is why should India allow the US to impose its unilateral foreign policy , that doesn’t have the UN’s approval and is opposed by many countries? India, though not a superpower like China, should be prepared to pay a price for what it believes in and not be influenced solely by short-term economic interests. It is more than likely that, when Trump’s era comes to an end—which may be soon—the US may even appreciate a principled stand, if India takes one.
It is not clear if India has done a careful cost-benefit analysis to find out whether it should comply with Trump’s unilateral diktat and give up its sovereign rights, or to continue to import Iranian oil and strengthen its ties with Iran. Trump’s unilateral action against Iran and Venezuela, without any support from the UN, has become a big geopolitical game. Currently, it is not possible to state who will be the winners and the losers. Quite possibly, all will be losers.
Writer is Former manager, Conoco, and former board member of the national oil company of Georgia