Iran election: Blood and oil

Iran is the second largest oil producer in the Organization of Petroleum Exporting Countries (OPEC). So what does the unrest there mean for oil prices in the short and long term? We asked oil expert Rachel Ziemba, RGE Monitor’s lead analyst for oil exporting economies, what she thought.

How will the turmoil in Iran affect oil markets?

The unrest will have the most significant effect on future oil prices and supply. I think the nature of the election will mean more of the status quo in Iran’s energy sector. That means a continuation of underinvestment, possibly a pullback of investment from U.S. and European-based international oil companies, especially since sanctions will likely be extended. In the shorter term, there is the possibility that the energy supply could be disrupted. But OPEC’s surplus capacity has doubled in the last year and oil stocks are well above their five-year average, so it might not have as much an effect on oil prices as it would have a year ago. The other critical point is that oil pries are being driven much more significantly by broader financial market trends. Crude oil futures have more than doubled since mid-March. Unrest in Iran doesn’t help oil prices but it’s not what’s driving oil prices up today.

What does this mean for the global economy?

One risk is that if oil prices and other commodities prices start rising, they might choke off an economic recovery. Rising gas prices might be one more hit to the overstretched U.S. consumer — higher gas prices would limit other spending and other private consumption. Even a short-term spike could have an effect on the economic recovery, but more significantly any other sort of reduction in oil exports from Iran could lead to pricing in more of a security premium or an Iran premium. In the last few years, oil analysts talked about a terror premium — an extra few dollars in the oil price that was pricing in the risk that security threats might lead to a certain number of barrels coming off the market. So, for example, if there is a fear that Iran might lower production, that would be factored into the oil price. And the bigger risk is that investment in the oil and gas industry continues to be weak. That may contribute to delays in natural gas projects and these could lower Iranian oil and gas production in the longer term. The needed investment to offset maturing fields is not being made. Iran estimates a decline rate of more than 5 percent of oil fields every year.

What will other oil producers do if Iran remains embroiled in violence?

The big thing here is whether the violence and unrest in Iran starts to have an effect on the energy sector. So far, as best as I can tell, it’s just freezing conditions. Should there be more significant unrest leading to damage to pipelines or sites being taken offline, then we could see other members of OPEC increase production if they are worried about a major slump in production. Demand continues to be week — oil demand is 2 million to 3 million barrels a day lower than last year — so this is a point where weak demand might actually limit the effect of any reductions in output.

See here for an overview of GlobalPost’s coverage of Iran’s election.