Iran’s Role in OPEC and the New Oil Bourse: What may be the impacts?

Since 1979, Iran is under trading sanctions by the US over its refusal to curb its nuclear program [1].  In 2010, the United States and Europe significantly tightened sanctions on Iran, making it difficult for countries to do business with Iranian companies in all types of trades such as banking, shipping, insurance and petrochemicals [1]. The sanctions have changed the dynamics of relationships between the group’s member states. OPEC ministers are now divided on how much oil to produce, with Saudi Arabia keen to keep prices stable at existing levels, Iran pushing to cut production and Iraq supporting Iran [2]. Sanctions levied by the U.S. over Iran’s refusal to curb its nuclear program significantly impacted exports of Iranian crude oil, i.e. it has been reduced from 2.5 million barrels a day to 1.6 million barrels in 2011 [2]. Iran and Iraq have formed an alliance within OPEC, raising concerns among producers like Saudi Arabia, thereby increasing the potential for discord in the oil producers’ group [3]. Saudi Arabia has a long standing rivalry with Iran. Saudi Arabia is predominantly Sunni and Iran is predominantly Shia, i.e. they belong to different Islamic factions, and both compete to be the frontline leader of the Muslim world. Iran has warned Saudi Arabia to refrain from increasing supplies to countries that can no longer import Iranian crude oil due to US sanctions [2]. Iranian oil minister Rostam Ghazemi has warned the US and Europe about increase in oil prices and market volatility [2]. In the OPEC meeting held in June 2012, it was proposed by Venezuela that the group should protest against the EU sanctions against Iran which were to begin on 1st of July 2012 [3].  This proposal was backed by Iran, Iraq and Algeria [3]. It was rejected by Saudi Arabia and other member countries such Nigeria, Libya and Kuwait [3]. The latter group argued that these issues are a matter of concern for the foreign ministers of the member countries and not oil ministers [3]. Saudi Arabia is determined to prevent the group being dragged into Iran’s nuclear deadlock with the west [3]. However it has been increasingly difficult for OPEC to maintain that neutrality, with the issue of sanctions causing a division in OPEC, forming a sub group between Iran, Iraq, Venezuela, Algeria and Saudi Arabia, Kuwait and UAE [3]. Growing relations between Iran and Iraq have been a concern for Saudi Arabia. Earlier in 2012, Rostam Qasemi, Iran’s oil minister, visited Baghdad for talks with Nouri al Maliki, Iraq’s prime minister, and during the visit it was announced that the two had agreed to adopt a unified position on OPEC production [3].

The two main oil trading exchanges in the world are the New York Mercantile Exchange (NYMEX) and the Intercontinental Exchange (ICE) in London. Oil is priced in U.S. dollars [1]. It is interesting to note that Iran has established an oil exchange known as the International Oil Bourse [1]. It was created by cooperation with Iranian ministries, the Iran Mercantile Exchange and other state and private institutions in 2005 [1]. The function of the International Oil Bourse is to act as an oil exchange for petroleum, petrochemicals and gas in currencies other than the U.S. dollar, primarily the Iranian Rial, Yuan and a basket of other major currencies [1]. Iran began to trade through this bourse on July 13, 2011 [1]. The bourse is still in its initial stages and a limited number of transactions have been done through it.

Not all countries follow the sanctions imposed by the USA strictly, a critical one being China [1]. India and China, though have decreased the quantities of their oil imports from Iran, continue to import a significant amount. Iran supplies China with about half a million barrels of oil per day presently [4]. This is after a 30% decrease in imports from China in 2011.  Iran’s oil bourse will make it easier for countries who do not want to follow U.S. imposed sanctions to trade in oil [1].  According to Iranian parliament member Fakhroddin Heydari, Iran’s oil exchange is its rebuttal to U.S. sanctions: “It also strengthens Iran’s position in setting oil prices in regional markets. The oil bourse helps us break the barriers of sanctions; therefore, enabling the world’s outstanding businessmen to enter into transactions without any problem” [1].

Another country which imports oil from Iran is India. In 2011, India imported 400,000 barrels a day from Iran [1]. In the latest news by Bloomberg, India has reduced oil imports in 2012 by 40% due to tightening U.S. sanctions [4]. In 2011, Iran supplied the oil to India on credit and the balance outstanding amounted to $7 billion.  India and Iran arranged the settlement through a Turkish banking arrangement [1]. This caused disapproval from the United States and was a temporary solution to manage Iran and India’s trade balance settlement situation [1]. Iran’s oil bourse, when it becomes more active and liquid, may fulfill the need for an alternate oil clearing union and may provide a substitute for such transactions. Iran has also started working on barter agreements with countries, for example it may trade oil with other commodities, such as rice, wheat etc. At a time when the U.S. dollar is vulnerable due to worldwide recession, Iran is piling on the pressure with their oil exchange [1].

According to the British Petroleum (BP) future energy outlook, by 2030 China and India will be the world’s largest and 3rd largest economies and energy consumers, jointly accounting for 35% of global population, GDP and energy demand [5]. Over the next 20 years China and India are expected to account for 94% of net oil demand growth [5]. The import dependency on oil is expected to increase by 91% for India, 80% for China and 94% for Europe [5].

Given that China and India will be amongst the top three largest economies in the future, with an increase in the number of their expected oil imports, their behavior towards importing of oil will be the key to OPEC’s future. The U.S. currently consumes 20% of world’s total consumption of oil and produces 8% of total world production; it is currently a net importer [5]. Its expected reliance on imports is expected to decrease in the future as can be seen in the graph. As the oil exporting countries will see a shift in demand from the U.S. to emerging economies, specifically India and China, combined with an international oil exchange which does not require the U.S. dollar to transact, world’s dependence on the U.S. will decrease. The OPEC sub division of Iran, Iraq and Venezuela, currently comprise of 50% of total OPEC reserves, and a combined production of 12% of world oil today. Since Iraq and Venezuela have strained relations with the U.S., they have no incentive to support the U.S. in its sanctions against Iran. India and China though currently have reduced their imports from Iran; continue to import a significant amount of oil to meet its current needs. Iraq, Iran and Venezuela will be critical in deciding the future of oil supply, and with their growing conflict with the U.S., will resort to the Iranian International Oil Bourse as a clearing union for international oil transactions. To meet the growing oil demand in the future, the developing economies will have no choice but to transact with some of the key OPEC members thorough the International Oil Exchange or else a rise in the price of oil will be witnessed. Given that the dependence of U.S. on imported oil would have been reduced and substituted by an increased demand from India and China, it will become imperative for OPEC member countries to cooperate with each other in order for OPEC to achieve its goals of achieving a fair price of oil. The shift to an international oil exchange which does not require U.S. dollars to transact will change the world economic and political scenario. Many developing countries are dependent on multi and bi lateral agencies for loans in USD as they lack the foreign exchange to settle international trade transactions. As a result the world is dependent on the U.S. as the U.S. dollar is the reserve currency for the world. If countries start transacting with other countries through an international oil exchange, where currencies other than the current reserve currency are used for settling transactions, it will relieve the pressure of obtaining foreign exchange in U.S. dollar for many developing and developed economies, thereby reducing dependence on the U.S. This will lead to a decline in the value of the U.S. dollar along with its status as the world’s reserve currency faster than the debt ceiling or a U.S. debt default. OPEC’s dependence on India and China will increase along with a decrease on the U.S., which will aid in member countries of OPEC to stick together as an interest group for their collective good.

 

[1] Barden, S. (2011, February 08). Iran’s Oil Bourse. Who is next? RIANOVOSTI.

[2] Jahn, G. (2012, June 13). Saudi-Iran rivalries high ahead of OPEC meeting. Bloomberg Businessweek.

[3] Chazan, G. (2012, June 15). Iraq and Iran form alliance within Opec. Financial Times.

[4] Lakshmanan, I. A. (2012, Nov 30). Nations May Keep Sanctions Exemption for Cutting Iran Oil. Washington: Bloomberg.

[5] (2012). BP Energy Outlook 2030. London: British Petroleum.

 

 

 

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One response to “Iran’s Role in OPEC and the New Oil Bourse: What may be the impacts?

  1. You have definitely given us a lot to think about in terms of the future role the U.S. will play in the global oil market. One of the more intriguing aspects of this developing dynamic between countries like Iran, Saudi Arabia, China and India is the distinct lack of leverage the United States seems to have. The U.S. is actively trying to move away from dependence on oil (both foreign imports and domestic consumption). We are experiencing an exponential growth in natural gas production, as well as increased engagement in other technologies that act as oil substitutes. At first glance, this seems to be a positive thing, but this also means that we are no longer the biggest players in a critically important global market. We may be moving away from a dependence on oil, but powerhouses like China and India will experience an increased dependence on foreign imports in the coming decades. With Iran controlling such a large supply and enjoying growing demand, it appears the U.S. is no longer in a position where they can curb the Iranian nuclear program through OPEC. As you illustrated in your post, countries with strained U.S. relations like Venezuela have little incentive to adhere to our sanctions on Iran. I definitely agree with you that this is going to require greater cooperation amongst the OPEC members. China and India in particular will have to play a leadership role not only in ensuring fair oil prices, but also in the volatile geopolitics attached to the global oil market.

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