US-Iran Treaty Can Send Oil to $40

While the world is distracted by the unending Greek saga (will it or won’t it leave the euro?) and the epic Chinese stock-market meltdown(and manipulation), something really important is going on. Three words sum it up: Iran and oil.

Negotiators have reached a deal with Iran to constrain its nuclear arms program. Despite the pessimism and outright fear-mongering, an agreement has been reached.

Don’t let China’s stock market and Greece’s debt melodrama distract you from paying attention to this issue — now that this deal is all butconsummated, the repercussions are potentially enormous.

The agreement to end 13 years of sanctions against Iran over its nuclear aspirations is likely to be the defining foreign policy achievement of the Obama administration. Iran had opportunistically pursued its nuclear ambitions after 9/11, accelerating the program once its biggest regional enemy, Saddam Hussein, was removed by the U.S. military invasion.

Normalizing relations between one of the largest military powers in the Middle East and the major powers of the West is a huge, game-changing event. Iran’s ruling party wants access to global markets, technology and capital; Iranian youth would like to access to Western consumer goods, culture and most of all, the Internet. How much any of these become part of the end result of a deal has yet to be determined.

What is perhaps most fascinating about this deal is the role and ambitions of China and Russia.

China’s motives are more obvious: It would like to blunt the projection of U.S. military power around the world, disengagement of the U.S. from Middle East politics and — most of all — a reduction of geopolitical tensions that tend to raise oil prices.

Russia’s interests are more complex, since it benefits from higher oil prices. Putting Iran’s huge oil production back on the market could exacerbate today’s global crude glut. Speculation that this will happen has already helped push down the price of oil, which has fallen by about a third in the past 12 months. Further signs of a Chinese economic slowdown also are weighing on crude prices.

Given the current situation, including sanctions against Russia for its role in destabilizing eastern Ukraine, one has to wonder what advantage there is for Vladimir Putin & Co. if Iranian oil begins to flow freely to the global market.

The Houston Chronicle quoted Neil Atkinson, an oil analyst at Lloyd’s List Intelligence in London, who observed, “It’s finally dawning on the market that the overwhelming weight of supply growth isn’t just going away… Iran is a huge factor. I can see $50 in sight for West Texas Intermediate [when a deal is reached].” Iran has 40 million barrels of crude stored on at least 23 ships that could be released into the market relatively quickly, the Chronicle added.

So what’s driving the Russians to be so cooperative? Perhaps the lessons of the 1980s are still fresh in Putin’s mind. What brought down the Soviet Union wasn’t the result of military failures or armed conflicts through surrogates. Rather, it was the economic might of the U.S. Supporting a huge military requires a large, efficient and productive economy and the Soviets simply couldn’t compete with the U.S. As much as former U.S. President Ronald Reagan is praised for the collapse of the USSR, Adam Smith deserves more credit.

The Russians may have figured out that fighting the American economy has been a losing game for them.

A peaceful, non-nuclear Iran might help to limit the U.S. presence in the Middle East, according to Gary Samore of Harvard’s Belfer Center. “The Russians don’t like to see the U.S. going around the world, bombing countries,” he noted.

Given the painful sanctions on Russia — and the related precarious economic state it is in because of much-reduced oil prices — greater cooperation between Russia and the U.S. could be mutually beneficial. Both want to see a defeat of the Islamic State. So does Iran. All benefit from a more stable Middle East, albeit for very different reasons.

Putin is smartly playing a long game. Lower oil prices will be painful in the short run for Russia. But an aggressive U.S., with an expansionist military around the world may be even worse. Hence, the surprising willingness of Russia to sign on to an agreement to lift sanctions against Iran.

The key takeaways of the deal with Iran is that it has the potential to lower energy prices, reduce tensions in an area fraught with conflict and create an opening for Russia to find a way to end the sanctions now hobbling its economy. A Russian economy that is better integrated into the world economy will have far better growth prospects.

It will be interesting to watch the contortions and hysterics among members of Congress opposed to the Iran deal. But as of now the critics of the accord lack a veto-proof majority. However much they might complain, it is likely to just be political noise.

Watch the price of oil. Consider what increases in supply and reduction of Middle East tensions do to its price. Then imagine what that could mean for the global economic recovery.


Originally published here: Something to Like in the Iran Deal




Print Friendly, PDF & Email

What's been said:

Discussions found on the web:
  1. rd commented on Jul 14

    Expect senators from oil-producing red states to go bonkers over this agreement. It might even make them forget about Obamacare.

    • rd commented on Jul 14

      The key thing to watch are the 1 to 5 yr oil futures. Those are some of the key ones for financing drilling as they can lock in their prices for their first couple of years of oil production. Those prices had not plunged as much as the spot prices, so drilling could still be financed. A big new oil source would likely drive down those 1-5 yr futures which is when we would see the real damage to the rig counts. Right now they have been sidelining the least productive rigs but they are still generating plenty of new oil.

  2. CD4P commented on Jul 14

    What happens to real estate values in Welliston, North Dakota???

    • rd commented on Jul 14

      Think what happened in Iceland after the financial crisis. However, they can’t go fishing in North Dakota.

  3. VennData commented on Jul 14

    Expect senators from oil-producing red states to be all for a drastic drop in oil prices… uh… well maybe not. Maybe they’ll allow it to pass only if Oil and Gas get special tax breaks on their too-high Federal taxes.

    • VennData commented on Jul 14

      In fact, tie passage of the Iran deal to tax cuts for ALL the rich. We’ll see how much Obama really wants this.

  4. orsogrigio commented on Jul 14

    Ok, oil now is cheap. With Iran it will be dirty cheap. That’s a problem for Russia, sure, but it’s a drama for ISIS. Russia is a Country, can discuss & find ways with other Countries, Mr Obama is ending, so wait a couple of years it’s not such a big problem. To ISIS DO is a problem. The agreement gives some breath to Iran, a foe of ISIS, and a strong kick to ISIS. Worsens relationships with Israel, sure, but again it’s written by Mr. Obama, lukewarm, and two Countries have a lot of ways to get along when they made their mind up. Mr Ritholz, a knowledgeable observer in my opinion (but I’m not alone) pointed out the true Russian problem, a very small economy. Russia GDP is 1/16th of US one (it’s just the size of the Italian one) and the farther WWII the less imperial ideology works. As Mr. Ritholz observed, Iranian population wants goods & lifestyle, and Iranian government trade e development, the times of US embassy in Teheran are far. I think that anything that reduces confrontation from abroad in ME is a net profit, and a more ‘relaxed’ Iran is a huge net profit for Israel too, helping Palestian leaders stop kicking their can and making the (I’m mad ? I’m afraid, but that’s the only solution foreseeable) Israel-Palestine Federation nearer. One last remark : oh, Iran could put together the BOMB, now. Well I think USA or Russia could wrap some A, H or wathever bombs in a nice colored paper and give them to Iran as a present. Nuclear bomb, for a Country, is a thing you simply cannot use, no way, so it is just useless, like a Ferrari in Venice in AD 1515. But you can use a few pounds of C4 or even TNT and a book and cheap propaganda. Let’s put all together : I sell my opinion for free, but leaders should bear in mind that only mountains stand still, and keep a calendar on their desks

  5. ilsm commented on Jul 14

    Iran “opportunistically pursued its nuclear ambitions after 9/11,”

    Motive to have nukes: the 120000 bombing sorties US has shot “misogynistically pursuing US’ imperial pomposity soiled by 9/11.

  6. Futuredome commented on Jul 14

    No it can’t. There would just be production cuts other places.

  7. intlacct commented on Jul 15

    Lower oil prices will not reduce internal tensions in the Middle East.

    • Liquidity Trader commented on Jul 15

      You have that backwards: Lower internal Middle East tensions will reduce oil prices

Read this next.

Posted Under