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Three Reasons Why John Kerry's Iran Deal Will Not Sink Oil Prices
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Oil prices swooned on Thursday as John Kerry claimed a major breakthrough in talks with Iran. They later recovered a bit but markets remained unsettled.

Will the deal sink oil prices? Probably not. Even if the Obama administration succeeds in getting a workable deal through Congress (a significant “if,” of course), there are at least three reasons why oil prices are probably not headed a lot lower.

  1. The overhang of Iran’s oil stockpiles has been greatly exaggerated. Sitting in tankers in Iran’s own waters, the stockpiles total a little more than 30 million barrels. The press has done its best to make this sound like a lot. What is not mentioned is that the world consumes more than 90 million barrels a day. We can get through Iran’s stockpiles before breakfast and no one will notice.
  2. All Western commentaries to the contrary, China’s consumption will continue to rise – and rise quickly. So will India’s. Respected commentators like Will Hutton and Robert Peston have suggested that China’s growth is grinding to a halt, and Gordon Chang has long predicted China’s collapse. But all such commentaries are based on cultural misunderstandings. The Chinese have never wanted to be understood and they have been working harder than ever to mislead outsiders in recent years. As I have pointed out repeatedly (most notably in my 2008 book In the Jaws of the Dragon), the more China is underestimated in the West, the longer it can hope to maintain its mercantilist trade policies. In reality China has considerable further growth potential. The evidence is most obvious in the auto industry, a particularly relevant yardstick in this case. At last count per-capita ownership of autos in China ran only one-eighth that of the United States. As the Chinese people see it, there is no reason why they shouldn’t enjoy as much access to personal transport as Americans – and these days, thanks in no small measure to technology transfers from Detroit, they can make all autos they want.
  3. Saudi Arabia relishes its role as the global oil market’s anchorman and will probably continue to manage prices. Of course, Saudi Arabia has less control than it used to but it often still wields considerable price-setting power. Over the short-term the Saudis have sometimes encouraged price volatility (they are believed to be the major factor in a reduction in oil prices in the last year — a move intended to discourage further fracking exploration in the United States). But in the longer term their interest is in price stability. If they let prices go too high, they risk not only a massive global wave of exploration but a strongly stimulated search for alternative energy sources. On the other hand if prices go too low, the Saudis unnecessarily deprive themselves of revenues. What is clear is that they enjoy plenty of room to support prices. If they have to cut production to keep prices high that won’t be such a disaster because they have been investing abroad for decades, and their large foreign assets can compensate for lower oil export revenues. As for Iran, it is not as if its entire production capacity will suddenly be thrown onto world markets. The fact is that all through the years of the embargo Iran has been selling to India and China. One issue to worry about is tension between Saudi Arabia and Iran: Saudia Arabia is Sunni whereas Iran is Shiite. But neither side has an interest in destroying oil market prices and the betting is that, despite their religious differences, they will come to some sort of mutually advantageous accommodation. Certainly that seemed to be the case in 2011, before Iran was subjected to the export embargo. Brent crude sold for an average of around $110 a barrel that year, roughly double Thursday’s close.
(Reprinted from Forbes by permission of author or representative)
 
• Category: Economics • Tags: Iran, Oil 
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