Why OPEC deal is a Double-Edged Sword for Iran

For instance, Saudi Arabia’s reference production quota under the Nov. 30 accord is set at 10.5 mbpd. That is 800,000 barrels more than the country’s production level as recently as 2014, when it was producing 9.7 mbpd. While the deal obliges Riyadh to cut output to 10.1 mbpd, it is evident that even under the accord, Saudi output will remain significantly above that prior to the past two years.

Moreover, while OPEC’s production cut is rather modest, more supply is likely to soon enter global markets. Two OPEC members that were able to secure exemptions under the Nov. 30 accord — Libya and Nigeria — can be expected to expand production in the near future, partly neutralizing the overall cuts. On the other, as prices increase, more expensive competition is likely to become commercially viable, especially from North America.

As for Iran, the OPEC deal’s definition of its reference production quota at close to 4 mbpd is not only a recognition of its pre-sanctions output as being the “normal,” but also of post-1979 maximum production. Iran can stay under this ceiling without any sacrifice. Ramping up production beyond this level would require massive new investment, which can in any case only materialize in the long run.

Here, rather than current OPEC quotas, it is the overall attractiveness of Iranian energy that matters, which is a function of not only energy economics but also the complex workings of both domestic and international politics.

With regard to Iran’s role within OPEC, it should be kept in mind that the Nov. 30 deal is only a success on the surface. The brunt of production cuts — almost two thirds — is taken by Saudi Arabia, the UAE and Kuwait. The remainder is distributed among seven other members. Thus, while Saudi Arabia was only able to convince two fellow Gulf Cooperation Council member states to make significant production cuts, it was the GCC that made the deal happen.

In the future, Iran can be expected to join other OPEC countries in calling for higher prices. When it comes to concrete action, however, as Iran is keen to expand its profile in international energy, it is unlikely that there will be much appetite in Tehran to follow more Saudi-led initiatives — especially maneuvers that will involve cuts in Iranian output.

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