Fereydoun Barkeshli, President of Vienna Energy Research Group, says even though Iran’s oil exports have declined, it does not mean that Iran has been marginalized in OPEC. He said in an interview with "Iran Petroleum", Iran would continue to remain as an influential OPEC member state.

The oil market is faced with special conditions due to US President Donald Trump’s tough sanctions against two major oil producers – Iran and Venezuela – and Washington’s attempts to prevent oil price hike. On one side, the Trump administration is making efforts to keep oil prices in the world markets and gasoline prices in the US from rising, while on the other side, it threatens OPEC member states on Twitter, asking them to produce more oil.

Imposing sanctions on Iran and Venezuela would mean lower global supply. The US is not content with this and is regularly calling on top consumers to stop their oil purchase from these countries. But is it possible? China and India are today the leading consumers of oil in the world and are therefore the main driving force behind demand for the black gold. Both are traditional buyers of Iran’s oil and are now under US pressure to quit buying oil from Iran.

Barkeshli said: “Over the past decade these nations tried their best to approach the Middle East nations, particularly oil producers in the Persian Gulf. From such perspective, the US sanctions policy against Iran or every other major producer would expose these countries directly to the threat of secure energy supply.”

Noting that Asia is the future destination of oil production and consumption, he referred to the idea of establishment of an OPEC-style body of oil consumers in which India and China would be member. 

“According to the idea, after these countries, Japan, South Korea, Pakistan and other Southeast Asian nations whose development depends on oil and gas could join such a body,” he said.

Oil Geopolitics in Mideast

The global oil supply currently stands at 100 mb/d, 30 mb/d of which is offered by OPEC.

The US has sought over recent years to undermine OPEC’s role in the global oil market significantly; however, what is highlighted these days is the impact of OPEC on the global oil market.

Barkeshli said: “The oil geopolitics is back to the Middle East and the global oil market. It has changed in essence and players and their composition have changed.”

He added: “With the turn of time, the conditions and sensitivities of pricing would factor in future markets and paper transactions, decisions of oil stock exchanges and the emergence of Internet and electronic intelligence. Since two decades ago, regional and geopolitical transactions have become the focus of attention.”

Increased storage by consumers constitutes a key factor that has caused changes in geopolitics and in the rank of oil market players. In other words, it has turned consumers into rivals for producers.

Touching on the significance of this issue, Barkeshli said: “The volume of storage has grown into a key factor in OPEC and oil ministers’ decisions.”

“Currently, OPEC’s argument for not raising the production ceiling is based on the supply glut. In light of big oil supply, incidents like what happened at Fujairah Port and the oil tankers berthed in Saudi ports did not affect the market too much,” he added.

Oil market analysts believe that despite all events transpiring the oil market, it would continue to make the best decisions possible. The oil market is volatile and is affected by economic and non-economic factors.

Overstated Spare Capacity

Never has the oil market been as fragile as it is today. Top OPEC producers - Iran and Venezuela- are not strongly present in the market due to US sanctions. Libya, Algeria and Sudan are faced with unclear conditions due to their political unrest. Saudi Arabia has not been immune to oil market ambiguities. It claimed to have a spare capacity of 11.5 mb/d, but in practice it did not offer such figures up to February 2018.

This issue was underlined by Iran’s Minister of Petroleum Bijan Zangeneh. Addressing the inauguration of Tehran’s annual show, he said: “The spare capacity announced by some countries is overstated and exaggerated.”

Citing oil market analysts, Barkeshli said Saudi Arabia’s actual production capacity could not go beyond 10.5 mb/d.

“However, if speculation about Saudi Arabia’s production capacity is true, the country must have been doped,” he quipped.

Noting that the oil market is currently engaged in a dangerous political process, Barkeshli said: “It seems that the US’s shale oil is rivaling the Middle East’s conventional crude oil.”

Anachronism at White House

Oil market analysts are faced mainly with the following question: Is it possible to remove Iran from the oil market? Are oil producers able to compensate for Iran’s possible vacuum?

In response to this question, it would be good to review the output of Saudi Arabia, Russia and the US. These three nations account for one-third of total global supply. Iraq is likely to join them in the coming decade. In OPEC and the global oil market, the nations’ strength depends on the number of barrels, but regarding the US, the point is that although crude oil exports have been authorized after 60 years, it is yet to become a net exporter. Meantime, shale oil has not yet gained a foothold in the global market and international exchanges.

Barkeshli said the oil market was at a decisive point as it had been taken hostage by US policies.

“By imposing oil sanctions, the US is taking control of the global oil supply management. The US’s policies today, particularly by President Trump, are reminiscent of the hegemonic policies of the past decades,” he said.

“It’s true that the US alone accounts for more than one-third of the world gross product and runs the most powerful army in the world. However, international conditions have changed significantly and President Trump has failed in all of its international actions,” he added.

Barkeshli said even the Senate did not understand what Trump meant by referring to Venezuela, Nicaragua and Cuba as the Triangle of Evil. “The White House is currently suffering from anachronism.”

Costly Oil Switch

Redesigning oil refineries has frustrated refiners. Is it possible to switch to a new category of oil fed into refineries? The answer is clear: It’s possible, but would cost too much.

To that effect, Barkeshli referred to the quality of crude oil, saying: “In the Middle East and some other oil producing countries, the first barrels of extracted oil contained light oil. The refineries were designed mainly to process light oil. But gradually, light oil production from oil fields declined the refineries were redesigned to process heavy and ultra-heavy crude oil, using sophisticated technologies.”  

He added: “The refineries that have been running on a special category of crude oil will have to spend a lot in order to switch from one grade to another grade of crude oil. In certain cases, they have to blend some grades of crude oil, which would again increase the refining costs.”

Iran is among producers of heavy crude oil whose specifications differ from those of Saudi Arabia’s oil. The refineries buying Iran’s crude oil would have to be redesigned in case they intend to stop buying oil from Iran and instead turn to Saudi Arabia or other countries.

This issue has already indicated its impact in the market. Due to the decline in heavy crude oil supply under US pressure against Iran and Venezuela, as well as the fall in Canada’s and OPEC’s output, fuel oil prices have increased. That poses a serious challenge to US oil refineries in the summer.

OPEC to Decide Under Tough Conditions

All factors have been combined to increase pressure on OPEC. The US has so far taken legal action against OPEC for its alleged cartel-style work. Even the establishment of the International Energy Agency (IEA) was aimed at pressuring OPEC.

As it is seen in President Trump’s tweets and statements, the US would keep increasing pressure on oil producers.  

Regarding the impact of US pressure on OPEC, Barkeshli said: “OPEC has been under pressure mainly by the US, but we have seen it make better decisions when it is under pressure.”

He added: “Some of the most important decisions of OPEC have been made under circumstances where part of a territory was occupied by another one and OPEC has proceeded with its activity. In fact, OPEC often makes decisions between its own member states regardless of political considerations.”

Barkeshli said OPEC owes its survival to Iran. “Many OPEC member states have in recent decades lost their output capacity totally or in part due to various reasons including US sanctions. Once, four OPEC member states were under sanctions: Iraq, Libya, Venezuela, Ecuador and now Iran.”

He said that natural disasters like flood, quake, volcano eruption and national unrest have caused a halt in oil production in some nations, but Iran has maintained its presence within OPEC.

“If Iran’s oil exports have declined due to sanctions, it would not mean that Iran has been marginalized within OPEC,” said Barkeshli.

Iran to Go Through Crisis

Iran’s petroleum industry is not unfamiliar with sanctions. Iran experienced such conditions during the nationalization of petroleum industry in the 1950s and also following the 1979 Islamic Revolution.

From 1951 to 1953, Iran could not sell oil, but it finally made its way into world markets.

During the 1980-1988 imposed war, Iran’s oil revenue fell to below $7 billion. Iran was selling oil at $7 a barrel. In the wake of OPEC’s ministerial meeting in Jakarta, Asian markets tumbled and oil prices started falling at an unprecedented rate.

Barkeshli said: “It would be very difficult to compare the present market conditions with those periods. We are under difficult circumstances, but Iran will definitely leave these conditions behind with strength. There must be plans for transforming challenges to opportunities because the issue is not limited to oil. Monetary and financial policies, as well as regional and international relations and active diplomacy are among the necessary principles of this sector.”

Iran has been under pressure in the oil sector in recent decades. The country has made efforts to make this sector resilient; however, oil is an international industry. Oil trading is naturally international and the most important factor of resilience would be its internationalization.

Iran is absent from global oil lobbies, making it difficult for Iran’s petroleum industry. However, what counts for the Islamic Republic is capacity building because barrels speak.

Courtesy of Iran Petroleum