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Is Iran in Oil Price War with Saudi Arabia?

Friday, October 17, 2014

Iran Review’s Exclusive Interview with Sara Vakhshouri
By: Firouzeh Mirrazavi

Reuters and Bloomberg news agencies recently published reports in which “two people with knowledge of the pricing decision” within the National Iranian Oil Company (NIOC) had been quoted as saying that “Iran will sell its oil to Asia in November at the biggest discount in almost six years, matching cuts by Saudi Arabia as global crude benchmarks slide deeper into a bear market. ” Following the reports, the NIOC’s director for international affairs, who is also in charge of Iran oil sales, said, “Iran has decreased its official oil sales prices, but this does not mean that we are engaged in a price war with Saudi Arabia.” The official emphasized that Saudi Arabia reduced the price of Arab Light crude for Asia in the current month as compared to the month before it and it was quite natural for price of Iran's oil to be reduced in proportion to Saudi Arabia’s oil price. The Iranian official added that such fluctuation in price was a function of supply and demand in the market.

Despite this issue, most experts and analysts of global oil market have argued that one of the most important reasons for the current slump in oil price is an effort by the United States to reduce prices by supplying Saudi surplus oil to the market in order to mount pressure on Iran and Russia. Saudi Arabia has not stopped at this level and has even considered special discount for its major customers in Asia. International media have reported that starting from next month, the NIOC will sell its light crude, which is the most important crude variety Iran has for exports, to Asian countries for 82 cents less than the average price offered by Oman and the United Arab Emirates (UAE). The figure would be one dollar lower than October price and the biggest price slump from December 2008. Iran has also reduced price of its heavy crude by 70 cents.

In order to analyze the aforesaid oil price developments in Iran and Saudi Arabia, Iran Review has conducted an interview with Dr. Sara Vakhshouri. Sara Vakhshouri is president of SVB Energy International, a Washington-based strategic energy consulting firm that provides critical advice on the global energy market to private companies, governments, think tanks, investment banks, and media organizations. An internationally recognized expert on the energy market and security, Dr. Vakhshouri has more than a decade of experience in global energy market studies, energy security and geopolitical risk. Dr. Vakhshouri has a PhD in energy security and Middle Eastern studies, an MA in business management (international marketing), and another MA in international relations. She is the author of The Marketing and Sale of Iranian Export Crude Oil since the Islamic Revolution. Complete text of the interview follows.

Q: Following the measure taken by Saudi Arabia to reduce its oil price in Asian market, Iran has also reduced price of its crude varieties for Asia delivery in November from 10 cents to one dollar. The reduction came one week after Saudi Arabia, the world’s biggest crude exporter, reduced price of its Arab Light crude for Asia delivery to the lowest level since December 2008. In your opinion, what is the main reason behind these reductions both by Iran and Saudi Arabia?

A: Saudi Arabia has started reducing its oil prices without cutting its production, and could have different reasons for this. Change of sale strategy could be the most important cause of this action. Saudi’s strategy has been shifted from maintaining a higher range of oil prices in to ‘maintaining and securing its market share’. Instead of waiting for more oil to come into the market and drop the prices, Saudi has take the initiative to adjust itself and its economy to the lower oil price and increasing its market share by offering discounted oil prices.

For Iran, the story is different; Iran is following Saudi’s prices cut trend because its crude oil type is very close to Saudi’s and for being able to compete with Saudi oil in the same markets, it has to offer same amounts of discounts. Not only Iran but also UAE and Iraq also started to reduce their prices. That’s the rational decision to make in order to be able to compete and survive in the same market.

Q: Some media outlets have been talking about a clandestine agreement between Washington and Riyadh according to which the United States has asked the Saudi monarchy to help it in a proxy war against Russia. In return, Washington will supply Riyadh with adequate human and other resources to topple the Syrian government. Based on such reports, the United States has asked Saudi Arabia to overflow international markets with oil in order to reduce prices and undermine economies of several countries. Also in a column for the New York Times, Thomas Friedman has posed this question: “Is it just my imagination or is there a global oil war underway pitting the United States and Saudi Arabia on one side against Russia and Iran on the other?” He argued that the United States is trying to mount pressure against the leaders of Russia and the Islamic Republic of Iran, and undermine the economies of these two countries. What is your opinion in this regard?

A: There is no doubt that lower oil prices will have negative effect on Iran, Russia or any other oil dependent economy. However I think this theory that Washington has asked Saudi to significantly reduce its oil prices is closer to an imagination than to the reality and lacks knowledge and deep understanding of the energy market. The low oil prices are the biggest threat against American tight oil development. The tight oil investors have already lost a huge profit and are very concern about their future plans for developing and increasing the tight oil production.

At this moment with the current technologies, extraction of tight oil is very costly compared to conventional oil. The conventional oil producers in the Persian Gulf including Iran and Saudi Arabia gain a huge margin of profit in compare to the unconventional oil producers. For most of the United States’ tight oil resources to be economically developed and produced, oil prices should remain at least around $70 per barrel in the long-term. With current costs, it is expected that the overall tight oil production will drop to about 20 percent with a downturn of oil prices below $70 per barrel. If oil prices drop below the range of economically profitable production, the drilling of new wells, for maintaining production levels, will mostly stop and tight oil production will reduce significantly within a period of between three to six months. The more recent price drops have reduced the profit margin of investors in US unconventional oil resources and have reduced the gap between current global oil prices to shale oil production costs to about only $20 per barrel. Obviously investors are only worry about their profit and investment return not loosing money for political games.

Iran’s economy is already under a significant pressure and putting more pressure on Iran or Russia, wouldn’t require Saudi and other OPEC members to go under a massive profit lost, and for U.S. to risk its oil production growth. Particularly that it was mostly because of the American tight oil production that the oil prices didn’t spike in the event of supply interruption from producing countries like Libya, Iran and Syria and Iraq, in the past several years. Therefore, the price plunge trend leading by Saudi Arabia could hurt U.S. tight oil production growth, a stronger rival for Kingdom’s oil market share in the near future.

Q: Some analysts have predicted that the upcoming meeting of the Organization of the Petroleum Exporting Countries (OPEC) will be marked with the highest degree of tension seen in an OPEC session from the beginning of political developments in Arab countries in 2010. They have added that the tension will be the result of Iran and Iraq being pitted against Saudi Arabia and the UAE over the oil price. Do you agree with this view?

A: Obviously there is going to be a tension among the members in the upcoming meeting. But Iran and Iraq are not the only OPEC members that are worried and going to hurt by the recent price fall. Venezuela, Nigeria and Bahrain’s economies and national budgets are also highly dependent on the oil of above $100 per barrel.

Q: In your opinion, what is the best strategy that Iran can employ under the existing circumstances?

A: Regarding the oil pricing and sale strategy, Iran has already taken the best possible strategy to maintain its market share by offering the same range of discounts that Saudi is offering to its customers. Iran is currently struggling with different sanctions and limitation on its oil export and cannot easily increase its production and export in order to reduce the gap of its expected revenue based on the previous price range. However the reality of the market, lower demand growth and bullish supply growth, has created a serious competition among the major oil producers in the market to maintain and secure their market share. Therefore, Iran has to play the same game that others are playing.

The fear of oversupply in the market in one hand and tendency and willingness of oil producers to increase their production, particularly in U.S. and Iraq, could pose a serious risk against Iran’s oil production and export growth. The recent price dive and high competition over securing market share, could increase the tendency among some of the oil producing countries to keep some of the possible upcoming oil supplies out of the market. This might make Iran’s job harder to obtain higher oil production and export capacity, and gain back its pre-sanctions market share. 

Key Words: Iran, Oil Price, Saudi Arabia, UAE, Iraq, Proxy War, Russia, US Tight Oil, OPEC, Sale Strategy, Sanctions, Vakhshouri

More by Sara Vakhshouri:

*Iraqi Turmoil And the Global Oil Market: http://www.iranreview.org/content/Documents/Iraqi-Turmoil-And-the-Global-Oil-Market.htm

*Gasoline Prices: Iran’s Achilles’ Heel: http://www.iranreview.org/content/Documents/Gasoline-Prices-Iran-s-Achilles-Heel.htm

*The Ukraine Crisis: A Game-Changer in the Global Energy Market?: http://www.iranreview.org/content/Documents/The-Ukraine-Crisis-A-Game-Changer-in-the-Global-Energy-Market-.htm

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