The Iranian deal throws Russia right back onto the world stage. For years all it could boast of was its huge supply of oil and gas which it fed to the industrial powers of Western Europe developing their dependency on it. Things went well for a while as Russia used the money to improve the well-being of its people; to make close friends of Putin into the super-super-rich; and to improve its military which had been down in the dumps.
The United States did not depend on Russian petroleum supplies. We had our own source that included Saudi Arabia which pretty much controlled the price of world oil. The price of oil and gas rose steadily over the years as did the dependency on it. More and more nations including China continually raised their demands.
The price rose to the level that it became financially feasible for a new push for oil in the United States. The cost of pulling oil out of the earth was higher here than in other parts of the world but the gain to be made with the price so high was substantial. Drilling went on full blast.
It reached the point where the United States pretty much became self-sufficient in oil production and had the capacity to become an oil exporter. Then the cost of oil plummeted. On March 15, 2015, the Economist explained why: “Mostly because of increased supply from America—up by 4m barrels a day since 2009. Although most crude exports are still banned, American imports have plummeted, contributing to a glut on world markets. Other producers have decided not to try to curb their production and keep the price up.”
Why did those other producers decide to do that?
The Economist answered: “The Organisation of Petroleum Exporting Countries is dominated by Gulf producers, notably Saudi Arabia. They have huge reserves to cushion the impact of low prices. They also hope that the slump will eventually shut down high-cost production, tightening the market again.” (my emphasis)
Will their strategy work.
Again the Economist answers: “Probably not. America’s shale production boom is based on new techniques—fracking and horizontal drilling—and unlike “big oil” involves small companies and small projects. These are flexible, meaning they will quickly respond to any price rise. And they are innovative: huge productivity gains still lie ahead.”
USA Today agrees saying there has been no significant cut back in U.S. oil production. The Wall Street Journal also concurs with some caveats. If the price goes to $60 or above that will be good for most companies in the U.S. and they will survive; if it goes below $45 that won’t be.
Here’s where the Iranian deal comes in. Saudi Arabia. Russia and Iran have three of the top four highest proven oil reserves. The Saudis have just met with the Russians to figure out how to work together on the issue; Iran will meet with the Russians on this soon. The wise men suggest the Iran deal will hurt Russia because more oil will come on the market causing the price to go down more. See here and here and here.
There’s another way to look at this. Saudi is keeping up full production despite the low prices. It wants to force the producers who need higher prices (USA) out of the market. To push the price down further where it will shut down the American market it needs a buy in from Russia and Iran. Those three working together can cause havoc by driving down the oil prices which will drive down American production.
Iran will go along. The only question is whether Putin can take it. Will an expansion of the war in Ukraine give him the time he needs? There’s a lot more to the Iranian deal than meets the eye. It may not be about the future of nuclear as much as it is about the future of oil.