Geopolitical and Macroeconomic impact of Iran re-entering the world stage

By Antony Mullin

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Fig 1 (Souce: The Economist)

On the 16th January 2016, The Islamic Republic of Iran reentered the world stage from its economic and political isolation, which started in 1979. The return of Iran imposes a new position onto the world market; a country cast out of the normal marketplace is set to return with the one commodity in 2016 no-one wants to see, oil.

Iran is currently the seventh largest oil producer; home to approximately 9.5% of the worlds proven crude oil reserves and 13.1% of Organization of the Petroleum Exporting Countries (OPEC) members. A country saddled by over thirty years of grievances caused by international sanctions and a lack of investment, Iran sees itself as a major player in a global geopolitical context, as shown by its strategic influence in Iraq, Syria and Yemen, and as a religious bastion for Shia Islam.

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Fig 2 (Source: OPEC)

Iran has been urging OPEC to cut overall production to accommodate its return to the export market, as approximately 45% of Iranian government revenue comes from oil and gas revenues. However, the price of oil has collapsed over eighteen months from over $120 per barrel to below $30, a fall of over 70%, only recently rebounding slightly to $40 over the past three months, affecting all oil producing countries with falling revenues.

For historical foes such as Saudi Arabia, and its Wahhabism religious movement within Sunni Islam, Iran’s return to the global stage could not be happening at a worse time. Saudi Arabia recently announced a budget deficit of $98 billion, about 15% of its gross domestic product, as it attempts to face down the US shale industry and a proxy war in Yemen.

These are complex relationships, from both an historical context and as a response current events, which can drive seemingly irrational behavior. All is not cozy in the OPEC house, witness the rising tension in Venezuela, let alone the other countries that require the income from oil exports such as Russia, which has been involved in the conflict in Syria.

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Fig 3 (Source: Slate)

Historically, swing producers such as Saudi Arabia, with 17.9% of the world proven crude oil reserves and 22.1% of OPEC membership reserves would cut back on production to balance supply / demand. However, the rise in US shale has had a dual effect: firstly it has removed US reliance on overseas supplies; switching the US from a net importer to a future exporter, and secondly the US shale boom is positioning the US as a swing producer, replacing Saudi Arabia. The recoverability and access to market means US shale producers can very quickly monetise output in their local market, namely the US consumer and their gas guzzling cars.

How must this be felt in Saudi Arabia, as the historical ally of the US? Now it sees the US pushing hard diplomatically to bring Iran in from the cold and at the same time reduce its reliance on Saudi oil, and potentially position itself as the swing producer. Fortunately, for Saudi Arabia and the global oversupply problem, Iranian production is not impacting global supplies as much as they must have feared, as production in Iran has been slow to ramp up for export markets.

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Fig 4 (Source: Infomine.com)

The world should not get used to a low oil price world for too long. Production rates will inevitably fall when existing fields witness reduced investment expenditure as companies reign in spending and capital expenditure. In addition, new exploration is being dramatically curtailed across the industry, leading to a slowdown in replacement reserves which will have a medium to long-term impact for supply. Efficiencies through new innovations are disappearing as companies curtail research and development budgets.

As we have witnessed over the past eighteen months since the dizzying heights of $120 oil price, things can change very quickly and dramatically. Just as dramatic as the oil price economic rollercoaster has been, the geopolitical rollercoaster will continue to surprise us over the next eighteen months. This new unfolding landscape will see Iran establish itself in the world economy, Saudi Arabia adjusting to its position as the former swing producer and the US riding on a wave of shale oil.

Antony Mullin joined the Royal Holloway MSc in Geopolitics and Security in 2015, after twelve years at BG Group in variety of senior roles. His research interests are in global energy security.

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