Exploring Iran’s Approach To Oil Production Freeze Policy? – Analysis

By Mohammad Khajouei*

Oil ministers of Saudi Arabia and Russia, as the world’s two top producers of crude oil, along with their Qatari and Venezuelan counterparts, held a quadrilateral meeting on Tuesday, February 16, 2016 in Doha, the capital city of Qatar, during which they agreed to maintain their oil output at the January level and avoid further increases in their crude production. Of course, implementation of this agreement has been made conditional on cooperation from other oil producing countries.

The main factor that brought countries like Saudi Arabia and Russia together despite existence of major political and security differences between them, was a drastic fall in global oil prices; a situation which has led to severe plummeting of these countries’ oil revenues.

However, it seems that the Doha agreement will not be able to have a major effect on oil prices. The first reason is that production level is too high even now. Although they have agreed not to make a further boost to their oil output, we must not forget that oil production already stands at a high level and, therefore, this agreement will have no effect on the existing production surplus in the oil market, which is equal to about 600,000 barrels per day.

Therefore, the output freeze policy cannot cause an immediate rise in the oil price and may only help oil prices to rebound in the second half of 2016. Perhaps, if they had agreed on reducing supply, the situation in the market would have changed.

The second reason for possible failure of the Doha agreement is related to the same condition that has been considered for its implementation; that is, the need for other oil producing countries to follow suit.

Iran tops the list of countries, which are not willing to fix their production at the current juncture and are not likely to follow this policy if they believed that fixing the oil output will have costs for them. The reason for this is also clear. Following removal of international sanctions against the country’s energy sector, Iran is trying to reclaim its share in the oil market and believes that at the present juncture the way is paved to make a move in this regard. Therefore, it is difficult for the country to accept for a different reason not to boost its production.

Iran’s oil exports have increased by more than 400,000 barrels per day during the first month after sanctions were lifted. Concurrent with the Doha meeting, managing director of the Iranian Oil Terminals Company announced that after removal of sanctions, Iran has hit a new record in terms of loading oil tankers and boosting oil exports. He added that for the first time in many years, more than seven million barrels of crude oil have been exported in a period of 48 hours of which four million barrels have been sent to Europe and the rest have been sold to Iran’s traditional customers.

Iran’s insistence on reclaiming its share of the oil market cannot be considered as opposition to collective decisions made by other oil producing countries. In reality, Iran has been a pioneer in believing in the necessity of controlling oil supply to prevent a price fall. Even after the Doha meeting, Iran defended general outlines of the oil output freeze plan, but announced that it will not give up its right to increase production and export of oil and reclaim its market share. During the latest meeting of the Organization of the Petroleum Exporting Countries (OPEC) last December, Iran also rejected to accept any limitation in its oil production.

Since June 2014 up to the present time, global oil prices have fallen by about 70 percent from 116 dollars per barrel to about 30 dollars per barrel. Of course, part of this decrease has been related to global economic slowdown, but one of the most important reasons was excessive oil production in recent months. In other words, a large part of the blame for reduction in oil prices is on these very countries, which are now talking about the need to fix output.

The threat that countries like Saudi Arabia now feel as a result of drastic oil price fall and sharp dwindling of their national revenues had been warned to them by Iran a long time ago, but their obstinacy prevented them from listening to Iran’s warning.

When oil prices started their nosedive, Iran was among those countries, which proposed supply cut, but some of these very countries who met in Doha, Saudi Arabia in particular, insisted on their policy to keep ramping up oil production, and at a time that Iran could not sell its oil due to international sanctions, they owned Iran’s share of the market.

Now Iran seeks nothing but to regain its lost share in the oil market. As a result, it is not logical for Iran to be the sole party expected to implement the oil output freeze policy. Perhaps, if a price has to be paid in this regard, it should be paid by the same countries who increased their output in past months and were not willing to reduce their share in the market.

It seems that at the present juncture, Saudi Arabia has reached the conclusion that continuation of its previous strategy to continue boosting oil production is not possible anymore. Therefore, it has decided to change course and by keeping oil prices fixed or slightly increasing them, continue to put pressure on shale oil producers, on the one hand, while on the other hand, blaming its main rival, Iran, for refraining from reducing its crude production.

In conclusion, if the oil output freeze or reduction policy is supposed to prevent Iran from making an effort to reclaim its past position in the oil market, it cannot be considered either rational or fair. How those countries who ramped up their production when Iran was under international sanctions, and caused the global oil price fall can now expect Iran to cooperate with them and pay the price for what they did?

* Mohammad Khajouei
Senior Middle East Analyst