Oil and gas in the capitals

A nuclear deal with Iran is bad for U.S. oil producers, even if the ban on U.S. oil exports is lifted. The negative impact on U.S. oil producers is not only from the additional oil production that Iran will bring online, once sanctions are lifted, but also from OPEC-on-OPEC competition as a reaction to the deal.

A normalization of relations between the U.S. and Iran, which some might view as far-fetched at this time, should benefit large service companies and oil majors, but not the medium-sized and smaller independent companies that brought the shale revolution. In addition, in the long run, Iran’s LNG exports will compete directly with U.S. LNG exports.

The negative impact on U.S. oil producers is not direct. The quality of crude that Iran produces is different from the oil that U.S. companies produce. In addition, Iranian crudes do not compete directly with U.S. crudes because of the ban on exports of U.S. oil. The impact is indirect, making U.S. producers a victim of U.S. foreign policy.

Newton’s third law of motion, “for every action, there is an equal and opposite reaction,” is not limited to physics. It also applies to economics and politics. Ignoring this law leads to several, sometimes dangerous, unintended consequences.

Saudi relevancy. In politics, politicians who support a nuclear deal with Iran ignore the reactions of Israel, Saudi Arabia, and the Arab states in the Gulf. This reaction might not be aligned with U.S. interests in the long run. When the leaders of Saudi Arabia realized that a nuclear deal with Iran was imminent, they embarked on hyperactive petrodollar diplomacy. Adel Aljubair, the Saudi ambassador to Washington, summed up the Kingdom’s response by stating that “all options” could be on the table. As we will see in a moment, those “options” include nuclear reactors for civilian and non-civilian use.

Saudi Deputy Crown Prince Mohammed Bin Salman visited Russia and France last month, and six deals were signed with Russia. One of the deals includes helping Saudi Arabia build some of 16 nuclear reactors “for peaceful purposes.” The reaction does not stop here: the Saudis want to make political deals with Russia, where the Obama administration has failed. They want to make a deal to stabilize Yemen and Syria. Oh, wait, there is more: Russia and Saudi Arabia signed a pact to create an oil alliance, a sort of “OPEC” on the side of the existing OPEC. In a sense, the Obama administration made the Saudis feel irrelevant. They are using Putin to regain their lost relevance.

During the Deputy Crown Prince’s visit to France, he signed deals worth $12 billion, including nuclear deals. The Saudis want to prove to the Obama administration that the U.S. lost billions of dollars of possible trade deals because of the nuclear deal with Iran. The message is loud and clear: if Iran gets nuclear, the Saudis will get nuclear too, without the help and the monitoring of the U.S.

The reaction does not stop here. Last month, Nawaf Obaid, a visiting fellow at Harvard’s Belfer Center for Science and International Affairs, who is considered a Saudi insider by many, wrote a column for CNN, stating that Saudi Arabia might build a nuclear program to deter the threat of Iran: “A nuclear Iran would be viewed as a direct threat to the Kingdom, and a response of equal measure would be considered prudent, necessary and justified.” He also warned against the assumption that Saudi Arabia will remain passive.

How does the above relate to the oil market? First, the Saudi refusal to cut production, as oil prices declined, is an “intervention.” The Saudi decision to increase production from about 9.6 MMbopd to 10.3 MMbopd is an intervention. Saudi has two objectives for this intervention: 1) maintain market share in crude, products, NGLs and petrochemicals; and 2) maintain OPEC unity. While the Saudi decision was purely economic, it was clear that they do not mind seeing supporters of the Asad regime in Syria get hurt—Iran, Russia and Venezuela.

However, Saudi might continue to increase production. Saudi strategy might have shifted recently from economics to politics—targeting Iran, Iraq and others, instead of U.S. shale producers. Immediately after the Saudis announced their “strategic alliance with Russia,” they announced that they are ready to increase production and rig count! Meanwhile, the Kingdom made an offer to ship oil to India on Saudi oil tankers, free of charge, at a time when Saudi oil exports to the U.S were at their highest level in almost a year.

Newton’s third law of motion does not stop with Saudi Arabia. In response to the complete loss of market share in the U.S., increased Saudi oil production, and lower prices, Nigeria decided to give large discounts in Asia to attract buyers who traditionally have been customers of the Gulf countries and Iran. This reminds us of the Nigerian actions in 1984, which started a cycle of repeated discounts and eventually led to the collapse of the oil market in the 1980s.

We have an action, which is the Iranian nuclear deal that led to a Saudi reaction, which includes increasing production, which in turn led to a Nigerian response, which is giving large discounts to former “Saudi” customers, which in turn affects the rest of the oil industry, including U.S. oil producers. Now you can see how a nuclear deal hurts U.S. producers.

Finally, Iran has been trying to build LNG trains for several years, to no avail. Lifting the sanctions should enable Iran to export LNG that can compete directly with U.S. LNG exporters. Iran holds the second-largest natural gas reserves in the world.

In short, a deal with Iran will not only hurt U.S. oil producers, it also will hurt U.S. natural gas producers.   

About the Authors

Dr. Anas Alhajji

Contributing Editor

Dr. Anas Alhajji is an independent energy economist and the former chief economist at NGP Energy Capital management. He is a well-known researcher, author, speaker and an award-wining academician and wood worker.