FAMINE: Save the Oil and the Wine (Revelation 6)

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Famine in Africa and in Yemen
South Sudan, Nigeria, Somalia and Yemen have been facing famine conditions since February 2017. A total of 20 million people are threatened by food insecurity brought on by armed conflicts and the climatic impacts of El Niño. The SDC, which already operates in these four countries, has released additional funding to deliver emergency aid and to expand its development assistance activities.
The situation is especially serious in South Sudan where almost five million people are already facing hunger. In Nigeria too, over five million people have no food security and suffer from malnutrition. In 2015 and 2016, the Horn of Africa was hit by a major drought which was exacerbated by El Niño, causing serious crop failures and livestock losses. Since then, more than 11 million people in Ethiopia, Kenya and Somalia are suffering from serious malnutrition.
Consolidation of current activities
Switzerland responds to provide aid for people suffering from famine. On 24 February 2017, Swiss Humanitarian Aid made an additional CHF 15 million available from its reserves for humanitarian emergencies to help countries severely affected or threatened by famine. This new contribution is in addition to the SDC’s current activities [in Nigeria, South Sudan, Somalia and Yemen]. It has also carried out and supported various projects in these regions for a number of years, in particular aimed at fighting food insecurity, improving means of subsistence, access to water and sanitation and protecting civilians. Experts from the Swiss Humanitarian Aid Unit (SHA) are also deployed in the field on behalf of the UN agencies and the SDC.
In anticipation of this looming catastrophe, the SDC regularly stepped up its efforts in the above-mentioned countries and provided a budget of CHF 48 million at the beginning of the year. The new funding therefore takes its contribution to humanitarian operations and development cooperation activities in Nigeria, South Sudan, Somalia and Yemen to CHF 63 million in 2017. Switzerland also contributed CHF 5 million to the UN’s Central Emergency Response Fund (CERF) for 2017 to enable it to fund emergency action in these countries.
Support for the World Food Programme’s operations
The central partner of Swiss Humanitarian Aid in the global fight against hunger is the World Food Programme (WFP), to which it gave CHF 69 million in 2016, its biggest contribution to any UN humanitarian organisation. Switzerland is not only a major donor to the WFP but also an important partner in the secondment of experts.
Swiss Humanitarian Aid regularly seconds members of the SHA to the WFP. In addition to its financial commitments, Switzerland is active in coordinating donors in the field. As a member of the humanitarian teams for these countries and as chair of the donor coordination groups in Somalia, Switzerland is involved in ensuring the efficient use of resources, crisis-response coordination and other activities.

The Third Seal: Famine (Revelation 6:6)

Last month, UN agencies declared a famine in parts of South Sudan, making it the first country since Somalia in 2011 to be declared famine hit. The world’s youngest nation is in the throes of a civil war that has not only created one of the pressing global internal displacement and refugee crisis, but also actively precipitated the famine.
As pictures of jubilant celebrations in the streets of its capital, Juba, were splashed across global newspapers a day after the country’s birth in 2011, few would have imagined that the country would be reduced to such a sorry state a mere six years later. Independence was seen as a great victory for the people, who for generations were brutally oppressed by the Arab-dominated north Sudan.
What went wrong? The answer lies in the violent, decades-long freedom struggle waged by the people of South Sudan, power lust among its principal leaders and the commodity that has made and unmade nations—oil.
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There is an old Sudanese proverb, “When god made Sudan, he laughed.” Meant to refer to the incredible riches and beauty of the land, the country’s violent history imbues it with dark irony.
Known to be home to valuable materials such as ebony and ivory since the 25th century BC, it had been a major trading partner of Egypt since Biblical times. In the following centuries, it saw the rise of Christianity, which gave way to Islam in the wake of Arab invasions.
Over time, the northern region, famed for its gems, saw the settlement of Arab miners and merchants. The area was laid claim to by the Ottomans in the early 19th century, and subsequently, by the great European powers, particularly the British, after the opening of the Suez Canal.
All through this, the nomadic tribes of South Sudan were taken captive by the merchants and sold, forming the crux of the Arab slave trade from the horn of Africa. Samuel Baker, a British explorer in 1862, vividly noted the role the slave trade played in the keeping Khartoum going as a bustling town. The British, who ruled Sudan jointly with the Egyptians, focused primarily on maintaining power over the north. Little interest was paid to the south, where the missionaries were allowed to operate freely.
While the British and the Egyptians finally ceded control in 1956, the prospect of Arab-led domination of the south, which comprised mainly Christians and tribes following traditional beliefs, led to a massive revolt in 1955, a year before the formal declaration of Sudanese independence.
This bloody uprising, known the first Sudanese civil war, lasted 17 years until 1972. After maintaining a fragile peace accord for a decade, Sudanese government’s declaration of the country as an Islamic state under the Sharia law sparked the descent into chaos again.
The second Sudanese civil war, led by the Sudan People’s Liberation Movement and its military wing, the Sudan People’s Liberation Army, lasted 22 years until 2005, making it among the longest civil wars of the modern era.
The southern faction, led mainly by the Dinka and the Nuer, raged internal fratricidal wars as well. However, the all-consuming need to fight for independence pushed the conflict to the backburner.
International pressure on the Sudanese government and the mounting costs of war led to a comprehensive peace agreement being adopted in 2005, which promised a referendum to the people of South Sudan after a period of six years. In 2011, when the referendum was held, the south overwhelmingly—98.83%—voted in favour of secession. On 9 July 2011, the world’s newest country was born.
As celebrations went through the night in Juba, the newly anointed capital, there was an outpour of diplomatic euphoria. “It is a reminder that, after the darkness of war, the light of a new dawn is possible,” said then US president Barack Obama, granting the newly formed country immediate recognition.
Yet South Sudan—with its ethnic divisions, chief among them between the Dinka (~35% of the population) and the Nuer (~16% of the population), dependence on oil to sustain the economy (about 60% of the GDP and 95% of government revenues), minimal infrastructure and high levels of militarization—was prone to falling into a conflict trap.
In July 2013, Riek Machar, the deputy president and a member of the Nuer tribe, was dismissed by Salva Kiir, the president and a member of the Dinka tribe, on charges of plotting a coup. Efforts to disarm the Nuer presidential guards suspected of being close to Machar led to the outbreak of hostilities.
Dinka soldiers ran amok in Juba and reportedly indulged in mass slaughter of Nuer civilians. The Machar camp retaliated and, soon enough, the country was in a state of civil war.
Since the outbreak of hostilities, the fight has often centred on oil, leading to large-scale displacements in the two oil producing regions of Unity and Upper Nile.
The human toll of the civil war has been punishing. According to data from the UN High Commission for Refugees, Upper Nile had about 140,000 registered refugees, followed by the Unity region where the count stood at about 100,000. However, the total number of internally displaced people is an order of magnitude higher at 1.85 million (one-sixth of the population) as per the UN Office for the Coordination of Humanitarian Affairs.
The Unity region, which is Nuer dominated and the home of Riek Machar, has been at the forefront of this violence. It alone accounts for about 45% of the total internally displaced population.
While the world’s attention has focused on Syria and the concerns of leaders of Europe and the US, the horn of Africa, among the poorest regions in the world, is facing a particular strain by catering to almost a million refugees, mainly arising from South Sudan and Somalia.
Ethiopia has borne a lion’s share of this burden, hosting close to 750,000 refugees, making it the fifth highest refugee destination in the world.
The human toll of the war in South Sudan has been compounded by the economic consequences which has been disastrous for the country.
With the government’s resources rapidly drying up, exchange rates have deteriorated sharply, sending prices soaring and the economy into a tailspin (see chart below). The hyperinflationary conditions have ensured basic necessities are either unavailable or simply unaffordable to the locals.
Large-scale displacement due to conflict has worsened the impact of soaring inflation. Unity, Upper Nile and Jonglie (another critically affected province) contain 40% of the country’s total cropland.
With the population almost entirely dependent on agriculture, large-scale displacement has wreaked havoc in local ecosystems and the agricultural economy, affecting supply and access.
The geographic, economic and political conditions have created the vortex that has thrown South Sudan towards this man-made famine.
As seen in this figure, the situation is grim across the country, with 100,000 people in Unity state facing starvation due to famine. Close to a million are on the brink of a famine and almost half the population, 5 million, is at crisis levels of food insecurity and worse.
***
The declaration of famine is not a straightforward act. It is made collectively by multiple parties: the affected country’s government, agencies of the UN and the Famine Early Warning Systems Network, set up by the US government in 1980s to collect and analyse data from various sources.
Given the multiplicity of parties, there are always multiple viewpoints to contend with. Moreover, the declaration itself contains political undertones and implications. Countries often find it hard to outlive the international stigma of a famine. A case in point is Ethiopia. Famine in 1980s and its media coverage has saddled the country with a misplaced reputation of mass poverty, even though it is presently the fastest growing economy globally.
The second challenge is that of data itself. Officially, famine is declared when the following three criteria are met:
• At least one in five households face extreme lack of food
• Thirty per cent or more of the population suffers from acute malnutrition
• At least 2 in every 10,000 people are dying each day
Given the specificity of the requirements and challenges of data collection in an unstable region, UN agencies and the country’s government have to be convinced that the situation has indeed escalated enough to deserve worldwide attention. This happens to be the case in South Sudan. The fact that famine has been declared implies that people have already started dying of starvation.
The response has been on expected lines, with relief agencies stepping up their involvement. WFP (the World Food Programme) has been airdropping supplies in affected areas, the Food and Agriculture Organization is giving survival kits and Unicef has set up hundreds of feeding centres to cater to kids facing malnutrition using ready to use therapeutic foods such as peanut-based wonder snack Plumpy’nut.
President Kiir has promised unimpeded access to humanitarian efforts to ensure that supplies reach the ones in need. Yet, the humanitarian agencies are nowhere close to reaching their target of $1.6 billion to provide lifesaving assistance to an identified population of 5.8 million. The conflict itself shows no sign of abating, with Riek Machar, currently exiled from South Sudan, continuing to direct opposition forces remotely from South Africa.
Amartya Sen in his seminal work Development as Freedom made a powerful argument that functioning democracies do not see famines due to the pressures of electorate faced by democratic governments.
The idea went on to change the prism through which famines were viewed. An example in India illustrates the contours of this argument. Bihar faced a situation of food shortage in 1966. Monsoon failure led to harvest season yields being only 50% of what was estimated.
In response, the government declared a state of famine. Keeping in mind the general elections scheduled for the next year, the government and the state machinery mounted an impressive response.
Large-scale feeding, income-assistance programmes and work-for-food initiatives were undertaken. At the end of it, a major catastrophe was averted and the number of recorded deaths stood at about 2,300, a remarkable achievement for a poor and relatively nascent state.
In 1974, political upheavals faced by the Awami League in Bangladesh, following the initial years of independence, led the economy into a decline and caused a sharp spike in in prices of basics. Flooding in the same year led to massive food shortages, and eventually, famine was declared.
Multiple coup attempts were made and, by 1975, Bangladesh was under a martial law. Limited state capacity, low levels of accountability, and political instability led to an insufficient response which resulted in a loss of about 40,000 lives from starvation and famine-related diseases.
State capacity and functioning political system in a way, proved to be the ultimate differentiator. As conflict continues unabated in South Sudan, its leaders have the choice of the path they want to lead their country towards. One hopes that the right choice is made soon. Millions of lives hang in the balance.

Save The Oil And The Wine (Revelation 6:6)

Summary

Last week Saudi Arabia, Venezuela, Qatar, and Russia reached an historic agreement to cap oil production at mid-January levels.

Absent an improbable cut in global production, oil prices will stay low as the current glut lingers on.
One of the reasons Saudi Arabia orchestrated a drop in prices was to challenge the nascent U.S. shale revolution.

Coupled with sanctions wreaking havoc on the Kremlin’s budget, the longer Saudi Arabia can keep prices down, the more it will compound Russia’s economic pain.

Saudi Arabia is also using low oil prices as a means of upending on its traditional rival, Iran.

Last week Saudi Arabia, Venezuela, Qatar, and Russia reached an historic agreement to cap oil production at mid-January levels. The pact – the first between OPEC and a non-OPEC member in 15 years – aims to halt the precipitous fall in oil prices that has wreaked havoc around the world.
While news of the deal sparked some optimism, any bullishness quickly faded as reality began to set in: the deal will not take a single barrel off the market. Absent an improbable cut in global production, oil prices will stay low as the current glut lingers on.
The decision to freeze rather than cut production seems counterintuitive; producers have been under incredible financial strain, with some seeking assistance in a bid to keep their economies afloat. But for Saudi Arabia, the chief architect of the current crisis, there are several reasons for keeping prices low. These include: halting the U.S. shale revolution, making Russia pay for its Syria incursion, and undercutting Iran and Iraq.
With these strategies now beginning to bear fruit, Riyadh will resist calls to cut production. Moreover, without OPEC cooperation, other producers will also pump at near record levels, desperate not to concede market share. Low oil prices will therefore continue, at least for the foreseeable future.

Countering the U.S. shale revolution

One of the reasons Saudi Arabia orchestrated a drop in prices was to challenge the nascent U.S. shale revolution. The next few years will see the U.S. set to become the world’s largest producer, while reports also suggest its shale output could double from 4 to 8 million barrels per day by 2035.
This may seem insignificant; the IAE forecasts worldwide demand at around 96 million barrels this year. But analysts claim that even a 5% cut in global output – around 4.8 million barrels – would raise prices by between 50 to 100% today. So, shale will almost certainly heap downward pressure on prices in the long term.
Just as important, the limited time and money needed to construct wells mean they can be capped on and off relatively easily. This provides Washington a flexible lever to balance price shocks and weakens Saudi Arabia’s influence as a “swing” producer.
Not surprisingly, Saudi Arabia has plotted shale’s downfall. With the high costs of shale production, Riyadh figured a dramatic fall in prices would drive these new players out of business, thereby preserving the status quo.
The strategy has produced mixed results. Despite dozens of companies going bust, many have proved resistant, tightening belts and digging in their heels. Slowly, however, these companies are succumbing to market forces, with a wave of bankruptcies expected this year.
While many doubt Saudi Arabia’s ability to hold off the shale revolution indefinitely – especially since procuring shale is becoming much cheaper – the House of Saud is unlikely to cut production soon, given the relief it would offer its U.S competitors.

Reacting to Russia’s incursion into Syria

Vladimir Putin’s incursion into Syria in September last year has changed the facts on the ground, entrenching Bashar al-Assad’s regime and diminishing the influence of Saudi Arabia and other Gulf nations. Whereas Assad’s rule had looked shaky at the war’s start, Moscow’s involvement now all but ensures his survival.
Furthermore, as Russia continues to strike at opposition rebels, many of them sponsored by Saudi Arabia, Riyadh’s clout is beginning to fade. Moreover, as its influence in Syria wanes, so too will its role in further peace talks and discussions about the country’s future.
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Dismayed at what they perceive as U.S. inaction in the face of Russian aggression in Aleppo and other flash points in the north, Saudi officials are becoming increasingly frustrated. Though the de facto OPEC leader is unlikely to get involved militarily without Washington’s consent, keeping prices low is one way to hurt Moscow’s fragile economy.
Coupled with sanctions wreaking havoc on the Kremlin’s budget, the longer Saudi Arabia can keep prices down, the more it will compound Russia’s economic pain. In fact, Russia’s finance minister, Anton Siluanov, recently claimed that the country needs $82 oil to balance the budget, with many analysts claiming that a default is now a possibility.
That might not change Putin’s calculations in Syria, but low oil prices will at least serve a costly reminder that Russia’s actions come with consequences.

Undercutting Iran and Iraq

Saudi Arabia is also using low oil prices as a means of upending on its traditional rival, Iran. True, the Saudi economy is heavily reliant on oil, with shipments accounting for 90 percent of its export earnings and 80 percent of government revenues. But it still enjoys a favorable financial position over its adversary across the Persian Gulf, with greater reserves and a smaller debt ratio. Meanwhile, Iran needs higher oil prices to break even.
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In terms of regional influence, therefore, Saudi Arabia is likely to keep oil prices low in a bid to outlast Iran. Eventually, Riyadh hopes the financial pressure will mean Iran is unable to maintain its proxies in Syria, Yemen and elsewhere.
Having made huge military and diplomatic strides recently, which includes a recent nuclear deal with the U.S., Tehran may be forced to adopt a less expansive foreign policy, allowing the Saudis to reconfigure alliances in the region and regain much of their lost influence.
Similarly, Riyadh sees low prices as a means of further destabilizing the impotent Shia regime in Iraq, which has been an Iranian ally since the overthrow of Saddam. The alliance between the two has stoked Saudi fears of a coming “Shia Crescent”, with Saudi Arabia’s rulers keen to ensure Iran’s neighbor remains bitterly fragmented. As an added bonus, in the longer term, continued instability may also mean Iraq is unable to develop its remaining oil reserves.

Man Refuses To Save The Oil And The Wine (Rev 6:6)

  
From Venezuela to Iraq to Russia, Oil Price Drops Raise Fears of Unrest

By CLIFFORD KRAUSS and RICK GLADSTONE
AUGUST 24, 2015

Oil, the lifeblood of many countries that produce and sell it, appears to be rapidly turning into an ever-cheaper economic curse.

A year ago, the international price per barrel of oil was about $103. By Monday, the price was about $42, roughly 6 percent lower than on Friday.

In oil-endowed Iraq, where an Islamic State insurgency and fractious sectarian politics are growing threats, a new source of instability erupted this month with violent protests over the government’s failure to provide reliable electricity and explain what has been done with all the promised petroleum money. In Russia, a leading oil producer, consumers are now paying far more for imports, largely because of their currency’s plummeting value. In Nigeria and Venezuela, which rely almost completely on oil exports, fears of unrest and economic instability are building. In Ecuador, where oil revenue has fallen by nearly half since last year, tens of thousands of demonstrators pour into the streets every week, angered by the government’s economic policies.

Even in wealthy Saudi Arabia, where the ruling family spends oil money lavishly to preserve its legitimacy, the government has been burning through roughly $10 billion a month in foreign exchange holdings to help pay expenses, and it is borrowing in the financial markets for the first time since 2007. Other Arab countries in the Persian Gulf that are dependent on oil exports, including Kuwait, Oman and Bahrain, are facing fiscal deficits for the first time in two decades.
While the price has been declining for months, forecasts have always been hedged with the assumption that oil would eventually stabilize or at least not stay low for long. But new anxieties about frailties in China, the world’s most voracious consumer of energy, have raised fears that the price of oil, now 30 percent lower than it was just a few months ago, could remain depressed far longer than even the most pessimistic projections, and do even deeper damage to oil exporters.
“The pain is very hard for these countries,” said René G. Ortiz, former secretary general of the Organization of Petroleum Exporting Countries and former energy minister of Ecuador. “These countries dreamed that these low prices would be very temporary.”

Mr. Ortiz estimated that all major oil exporting countries had lost a total of $1 trillion in oil sales because of the price decline over the last year.

The apparent weakness in the Chinese economy is radiating out into the world,” said Daniel Yergin, the vice chairman of IHS, a leading provider of market information, and the author of two seminal books on the history of the oil industry, “The Prize” and “The Quest.”

“An awful lot of producers who enjoyed good times were more dependent on Chinese economic growth than they recognized,” Mr. Yergin said. “This is an oil shock.”

Although the price drop has most directly hurt oil exporters, it also may signal a new period of global economic fragility that could hurt all countries — an anxiety that already has been evident in the gyrating stock markets.

The price drop also has become an indirect element in the course of Syria’s civil war and other points of global tension. Countries that once could use their oil wealth as leverage, like Russia, Iran and Saudi Arabia, may no longer have as much influence, some political analysts said. Iran, which once asserted it could withstand the antinuclear embargo of its oil by the West, appeared to have rethought that calculation in reaching an agreement on its nuclear activities last month.

Of course, lower oil prices confer economic benefits, too. The average American household, for instance, buys 1,200 gallons of gasoline every year. And gasoline, on average, has sold for most of this year by roughly a dollar a gallon less than in 2014.

But even while lower oil prices stimulate economies of consuming countries, a protracted decline carries many unanticipated consequences — starting with the economic weakness in developing countries that buy increasing amounts of goods from the United States and others in the industrialized world.

A supply glut has been evident for some time, driven partly by a vast increase in Saudi production and a growing energy self-sufficiency in the United States, which was once heavily reliant on Middle East oil.

Saudi Arabia not only is producing a record amount, but also is increasing the number of rigs drilling for future production. And its Gulf allies, the United Arab Emirates and Kuwait, are following suit. Even with the turmoil wrought by the Islamic State, Iraq’s production has jumped nearly 20 percent since the beginning of the year.

The surge in production may seem counterintuitive, since lower prices can cause self-inflicted economic wounds and potentially incite more political and social trouble. But all the exporters in the Middle East are struggling with each other to protect Asian markets, now that the United States is using much less of their oil.

The Gulf states, said Sadad I. Al-Husseini, former executive vice president of the Saudi Aramco oil company, “don’t want to take on the role of oil price regulators because the market is far too big and too political for them to manage it.”

Had these producers curtailed their production late last year, he said, “a flood of new oil supplies from the U.S., Canada, the deep offshore and other basins would have continued to undermine the oil markets, and prices would have collapsed to where they are now in any case.”

The global glut is likely to worsen if the nuclear deal with Iran is approved, potentially releasing as much as one million more barrels onto the 94-million-barrel-a-day global market in a year or so.
Iran’s oil minister, Bijan Namdar Zanganeh, has made no secret about his country’s intentions. “We will be raising our oil production at any cost, and we have no other alternative,” he was quoted Sunday in Iran’s state-run news media as saying.

The big change in recent years has been the surge of United States oil production, adding more than four million barrels a day to global supplies. But in recent months the oversupply has been driven primarily by the Saudis, who have flooded the market in what economists regard as a deliberate attempt to drive down the price so that other high-cost producers can no longer compete — most notably the Americans.

Still, production in the United States has not declined as much as foreseen by the Saudis, who thought the price of oil would stabilize at about $50 a barrel. Now it may be headed to $30, the lowest level since the 2008 global economic recession.

The Saudis, the most important member of OPEC, have resisted calls by other members to reduce output. The result is that nearly all OPEC members, who together control much less of the global market than they once did, are pumping more oil.

“We are witnessing competition between member states over market share, and most of these countries are dependent on oil as a primary source of income,” said Luay Al-Khatteeb, a nonresident fellow in foreign policy at the Brookings Doha Center. If prices do not recover to the $60 a barrel level, he said, “and countries in the Arab region continue to rely on oil revenue heavily, we could see decades of decline.”

David L. Goldwyn, who was the State Department special envoy and coordinator for international energy affairs in the first Obama administration, said that if the Brent global oil benchmark price stays below $45 a barrel, that is “a red flag for stability issues across the oil producing world.”
“The hemorrhaging of government budgets reliant on oil will force dramatic cuts in spending or dangerous increases in borrowing, if not both,” Mr. Goldwyn said. “The countries without significant foreign exchange reserves are most at risk, and they include Nigeria, Angola, Algeria, Venezuela and Iraq. The countries which need to sustain investment to maintain political legitimacy need to be worried, and that’s Brazil, Russia and even Iran.”

Meghan L. O’Sullivan, director of the Geopolitics of Energy program at Harvard’s Kennedy School, said she was most immediately concerned about the impact of extended low oil prices on Iraq.
“Not only is fighting ISIS an expensive endeavor, but many of the political deals that need to be done to keep different groups supportive of the Iraqi government require money to sustain,” she said.
But Ms. O’Sullivan expressed a longer-term worry about possible miscalculations by Saudi Arabia, on both the duration and magnitude of the oil price drop.

“With a burgeoning population looking for jobs, education and health care every day,” she said, “the expensive social contract between the royal family and Saudi citizens will get more difficult, and eventually impossible, to sustain if oil prices do not recover.”

Save The Oil And The Wine (Revelation 6:6)

The nuclear deal is mostly about oil

The recent nuclear non-proliferation agreement between Iran and the U.S. has created a firestorm debate in the Middle East and both sides of the Atlantic. While the deal is supposedly all about nuclear power and nuclear bombs, its practical implications are all about oil. But the conclusions we should make about its impact on the energy sector are far from clear. A ratification of the deal would allow Iran to make lucrative long term production and distribution contracts with foreign energy firms. However, freely flowing oil from Iran would add significant new oil supply into the world markets, disrupt U.S. plans to become an energy exporter, and could potentially put further downward pressure on prices.

The U.S. Energy Information Administration (EIA) reports Iran’s proven oil reserves as the fourth largest in the world, at 158 billion barrels, or about 10% of the world’s crude oil reserves. It also has the world’s second largest reserves of natural gas (Oil & Gas Journal, January 2015). But as a result of the series of sanctions laid on Iran by the United States and the United Nations for Iran’s failure to abide by nuclear inspections, which have essentially blockaded the nation, these reserves have done little good for the Iranian economy or the theocratic Muslim government that holds the country in its tight grip.

The IMF estimates that Iran’s oil and natural gas export revenue had been $118 billion as recently as 2011/12. But by 2012/2013 revenues fell by 47 percent to $63 billion. Revenues declined another 10 percent in 2013/14 to $56 billion (Islamic Republic of Iran, Country Report, April 14, 2014). By May 2015, Iran’s daily oil production had fallen from 4 million barrels in 2008 to just over 2.8 million barrels.

It goes without saying that the removal of the sanctions regime will allow Iran to resume exports at levels seen in the past. And if Iran is true to its word, and that its nuclear program is indeed focused on the development of nuclear power plants, then it is likely that its domestic demand for fossil fuels will fall, thereby allowing for even greater exports.

The first issue regarding Iran’s new oil flow is how easily will it be able to reestablish its former customer links and sell its oil, regardless of increased production. Having destabilized the Middle East by killing Saddam Hussein, the U.S. may wish now to leave the areas’ nations alone to sort out the resulting mess. Into this void we can be sure that the Chinese and Russians will stride forcefully and deliberately.’

Even if Iran is successful in regaining former customers, and selling down its inventory, how quickly can its production be increased? The Iranian oil infrastructure has been neglected for years and Iran needs to rebuild it desperately. Fortunately, Western expertise in energy development is by far the most advanced, which will give Western interests a leg up on Chinese and Russian rivals. But Chinese cash and strategic support may prove decisive.

Reuters reports that, in the opinion of 25 economists and oil analysts, Iran could be able to increase its oil production by up to 500,000 barrels a day this year and reach 750,000 a day by mid-2016. This will add to a current global oversupply of some 2.6 million barrels a day.

Meanwhile, as the price of oil remains relatively depressed, production wells in the U.S. and other producing nations, planned and established when oil prices were much higher, are drifting off stream. Finally, there is increasing evidence that recession may be felt internationally, reducing at least the rate of growth of oil demand if not the absolute level of demand in some countries.

Today’s oil market faces a global supply overhang and price weakness. Iran’s new oil production and exportation is not likely to come on line for at least a year or two, provided the treaty is ratified. But when that oil does start to flow, the new supply could add to downward price pressures. However, the amounts are unlikely to greatly affect the totality of the global marketplace and by that time whatever inflationary effects there may be of continued monetary expansion in America and Europe should act as a stronger force pulling prices upward.

In total then, the return of Iran to the global energy market should have a beneficial effect on the global economy, both in pushing down prices and providing lucrative development work for oil companies around the world. However, the economic aspects of the deal are largely insignificant in comparison to the geopolitical ramifications.

President Obama’s nuclear arms deal leaves open to debate whether Iran will become a nuclear power within the next decade, if not earlier. Unleashing a nuclear arms race in a highly unstable area of the world would render oil supplies sourced from there considerably less secure and unattractive, possibly even at lower prices, to consumer nations, including the 500 million strong EU.

The deal will also threaten the longstanding alliance between the United States and Saudi Arabia. The implicit arrangement between the two countries has always been that the Saudis would direct the lion’s share of its oil exports to the United States in exchange for American support of regional Saudi security interests. Shiite dominated Iran has always been one of Sunni-led Saudi Arabia’s top concerns. If the U.S. and Iran drift closer together, Saudi Arabia will surely seek other partners who are more supportive of its interests.

No one knows what such a Middle East will look like. But given the volatility of the region, change is unlikely to be pretty.

Save The Oil And The Wine (Revelation 6:6)

How an Iran nuclear deal would impact oil prices

By Nick Cunningham, Oilprice.com
June 27, 2015

A deal stopping Iran’s nuclear program and lifting Western sanctions on the country would immediately push down oil prices, writes Nick Cunningham. The country has 40 million barrels of oil in storage and could ramp up production quickly.

Oil prices have leveled off in recent weeks, but with the negotiations over Iran’s nuclear program bumping up against a deadline, that could change.

After crashing last year and then hitting several peaks and valleys, oil prices have traded within a relatively narrow range, with WTI bouncing around a bit above and below the $60 per barrel mark, and Brent staying near $64 per barrel. Of course, day-to-day there has been volatility as usual, but oil prices have been stable (relatively speaking) since the end of April. Even the OPEC meeting came and went without so much as a shrug from the oil markets.

But the deadline for the Iran negotiations – ostensibly set for June 30 – is only a week away and the outcome could have broad ramifications for the oil market, both in the immediate aftermath and over the long-term.

If a deal can be agreed to by both sides, Iran could bring a wave of oil production online. Western sanctions have knocked 1.2 million barrels per day offline since 2012. Although estimates vary, Iran might be able to bring 400,000 barrels per day online within a few months, perhaps as much as 700,000 barrels per day by the end of the year, growing to well over 1 million barrels per day sometime in 2016.

Also, Iran has somewhere around 40 million barrels of oil sitting in storage, a lot of which could essentially hit the market as soon as sanctions are lifted.

If news breaks that a deal is in hand, oil prices will sink on the expectation of this future volume, potentially dropping by $5 to $10 per barrel. And as Iran actually does ramp up output over time, and the rest of OPEC opts against cutting back to make room, global supplies will increase. That will keep a lid on future price gains and extend the current period of soft pricing.

Of course, supply and demand will have to balance out over time, and more Iranian crude will force a larger adjustment from U.S. shale, so U.S. oil production could see a deeper contraction.

ISIS Destabilizes Iraqi Oil (Rev 6:6)

  

ISIS is making the biggest threat to oil prices even worse

The Telegraph
ANDREW CRITCHLOW, THE TELEGRAPH
MAY 30, 2015, 10:30 AM 25,153 22

Thick black smoke rising from the could be seen as a dirty smudge on the horizon as far away as Baghdad after fighters from the Islamic State of Iraq and the Levant (Isil) set fire to the enormous processing plant just over 100 miles north of the capital last week.

The decision to torch the refinery, which once produced around a third of Iraq’s domestic fuel supplies, was made as the insurgents prepared to pull out of Baiji, which they captured last June in a victory that sent shock waves across world oil markets.

A year on from the start of the siege and a shaky alliance of the Middle East’s major Arab powers, with the limited support of the reluctant US government, has failed to contain the expansion of Isil.
The problem for the US and the rest of the industrialised world is that the Middle East controls 60pc of proven oil reserves and with it the keys to the global economy. Should Isil capture a major oil field in Iraq, or overwhelming the government, the consequences for energy markets and the financial system would be potentially catastrophic.

Many of the countries most threatened by the onslaught of the extremist group, which has grown out of the chaos of Syria but was initially dismissed as a wider threat to regional stability, will gather at the end of this week in Vienna for the meetings of the Organisation of the Petroleum Exporting Countries (Opec) .

Iraq, Saudi Arabia, the Gulf states and Iraq – which together account for two thirds of the cartel’s production – are all now affected by the inexorable march of the Isil jihadists but appear powerless to prevent it due to the widening sectarian schism between the Sunni and Shia Muslims across the region in the wake of the Arab spring uprisings five years ago.

Oil ministers gathering to decide on production levels at Opec’s secretariat building in Vienna will normally stay clear of wider geopolitical issues during their deliberations in the Austrian capital. However, the threat posed by Isil and its brutal brand of Islamist extremism is likely to force politics onto the agenda. It certainly can no longer be ignored.

According to Daniel Yergin, the energy expert and vice-chairman of IHS, the business information provider, the biggest threat to oil prices is the political chaos that threatens to engulf the Middle East, combined with the West’s reluctance to intervene.

Speaking to The Sunday Telegraph, Mr Yergin argued that the price of a barrel of oil could skyrocket to levels above $100 per barrel if Isil is allowed to press deeper into Iraq, the second-largest producer in the cartel after Saudi Arabia.

“Isil presents a whole new reality for the region, which just isn’t reflected in the oil market at the moment,” said Mr Yergin. “It’s an increasingly grave situation for most of Opec and the Middle East. At some point the security issues will start to come back into the price of oil.”

Up to this point, oil markets have shrugged off the risk of a major supply disruption caused by the worsening security situation. Traders have remained focused on the market fundamentals that almost 2m barrels per day (bpd) of excess oil capacity will be more than enough to absorb any supply-driven shock. A rally in the price of Brent crude – a global benchmark – which began in January and saw prices push close to $70 per barrel has lost momentum amid signs that higher prices could revive drilling in the US.

Just over six months ago when Opec’s 12 oil ministers last met in Vienna the cartel decided to continue pumping oil at a level of around 30m bpd, which effectively fired the first shots in an oil price war against shale drillers in North America, and Russia.

After almost a decade of oil prices ticking along at above $100 per barrel during which the group ignored the shale revolution taking place in the US, Opec decided to act last November. Under massive pressure from its most powerful member Saudi Arabia, the cartel allowed market forces to drag down oil prices. Initially, the strategy worked.

Within a month, oil prices had fallen to multi-year lows below $50 per barrel, sharply lower than the $115 year-high achieved last June when concern over the civil war in Syria caused a spike in prices. The sudden downturn in prices immediately had the desired effect on oil producers outside the Opec cartel.

In the US, oil companies began to shut down drilling rigs at a record rate. According to Baker Hughes, rig numbers have fallen for 24 straight weeks to 659 rigs as of last week compared with a record 1,609 rigs operating last October. In high-cost production areas such as the North Sea the impact of Opec’s decision to allow oil prices to fall naturally has shaken the industry to its core.

In his last budget of the Coalition government, George Osborne was forced to offer North Sea oil companies tax breaks to soften the blow of lower prices, while hundreds of jobs have been lost in Aberdeen.

“Opec has embarked on a strategy of leaving the oil price to the market and is willing it seems to allow the economics of supply and demand to take effect,” said Mr Yergin. “What is so startling is that geopolitics has been stripped out of the oil price for now but sooner or later it will be factored back in.”

Oil prices have gained roughly 30pc since the beginning of the year to trade at around $65 per barrel, with major banks and trading houses. However, traders have so far ignored the risks posed by Isil now to oil supplies, or the danger of a major terrorist attack on oil facilities in Saudi Arabia. Goldman Sachs has instead forecast that prices could again fall to $45 per barrel by October as US shale drilling picks up.

According to Mr Yergin this analysis ignores the dire political situation in the Middle East and the US government’s reluctance to acknowledge the danger to the wider global economy. Many of these analysts have focused on the continuing glut of new oil supplies from Saudi Arabia and Iraq. Both nations appear to be fighting for greater market share by filling the gap that is opening up in the oil market as higher cost production is shut down.

Swing producer Saudi Arabia is now pumping more than 10.3m bpd of crude, a record for the kingdom which maintains the capacity to produce up to 12m bpd if required. Despite the encroachment of Isil, which now controls the country’s largest province, Iraq has also dramatically increased its oil production over the past six months.

Iraq is poised to lift its exports by as much as 800,000 bpd to around 3.75m bpd next month as the government in Baghdad desperately tries to increase its revenues, which have been crippled by falling prices. In either case, a major terrorist attack on oil export facilities would shatter confidence and the notion that $100 oil is a thing of the past.

Although most of Iraq’s major oil fields are located in the south of the country, which are Shia Muslim heartlands, the failure of the Iraqi army to deal with the threat of Isil is a sign of their vulnerability to isolated attacks. Meanwhile, Saudi Arabia is in a virtual state of lockdown after the bombing by Isil militants of a Shia mosque in the oil-rich Eastern Province. The brutal attack, which appeared designed to provoke sectarian unrest in the kingdom, killed 21 worshippers and injured 80 others.

Saudi authorities have stepped up security at the country’s vast oil installations. The kingdom, which accounts for 12pc of global oil supply, is effectively under siege. To the north, jihadists threaten its borders from Iraq and Syria. In the south it launches air strikes against Iranian backed Houthi rebels in Yemen but has so far failed to defeat the tribes, which have continued to make territorial gains.

To add to the problems facing Saudi Arabia’s new ruler, King Salman bin Abdulaziz al-Saud, his kingdom is also facing insurgency from the so-called Al Qaeda in the Arabian Peninsula terrorist group which is intent on destabilising the regime.

Against this cataclysmic backdrop of bombs falling in Sana’a and with Isil literally at the gates of the major Iraqi city of Ramadi, many US energy and security experts were shocked to hear President Barack Obama ignore the danger in a recent keynote speech in which he pinpointed global warming as an equally big risk for Americans.

“Climate change constitutes a serious threat to global security, an immediate risk to our national security,” warned Mr Obama in a speech that many have criticised as symptomatic of the administration’s desire to disengage from the region which still provides a significant share of its oil.

Despite the growing focus on climate change and the campaign to limit fossil fuel production, Isil will be a bigger concern for the majority of oil ministers around Opec’s table next week.

The Obama administration’s reluctance to intervene marks the end of a US policy to protect the region’s oil which has remained in existence since President Franklin D Roosevelt first met with modern day Saudi Arabia’s founder King Abdulaziz in 1945. It was this commitment that drew America into the first Gulf War in 1991 and again in 2003 when it decided to bring down the curtain on Saddam Hussein’s regime.

However, Mr Obama’s lack of a viable alternative foreign policy for the region has put world energy markets at risk.

“How US national and foreign policy will integrate itself again with the region is unclear,” said Mr Yergin.

Washington’s determination to pursue a nuclear deal with Iran has arguably destabilised the region by placing Riyadh and Tehran on a collision course . Saudis are dismayed that Iranian military advisers are aiding the assault to recapture Ramadi, a city in Iraq’s Anbar Province which US forces fought so hard to secure 10 years ago.

Although Opec makes it a rule to stay away from politics, tensions between its 12 members are never far from the surface when they gather in Vienna. The organisation is one of the only remaining inter-governmental settings outside the United Nations where senior Saudi and Iranian officials can sit down together, which makes next week’s gathering potential dynamite.

Iran opposed Saudi Arabia last November when the kingdom’s oil minister, Ali al-Naimi, insisted that the group should stand on the side lines and allow market forces to drive down the oil price in order to render high-cost oil such as US shale unprofitable. Years of sanctions have crippled Iran’s economy and eroded its oil industry, which has added to pressure on the regime to agree to a nuclear deal with America under any terms. However, Iran needs oil prices above $100 per barrel in order to support its Shia Muslim allies, including the Houthis fighting Saudi Arabia in Yemen, in the wider Middle East.

Insiders say Saudi Arabia will get its way once again in Vienna and expect Opec to agree to “roll over” their production settings. With vast foreign currency reserves Riyadh and its Arab allies in the Persian Gulf can weather the storm better than Iran, while the continuation of lower oil prices will limit Tehran’s ability to support Saudi’s enemies in Yemen.

The danger is that Isil has other plans.

Save the Oil: Why the Iran Deal Won’t Happen (Rev 6:6)


Why Does Russia Fear Iran’s Nuclear Deal?

Posted By: Polina TikhonovaPosted date: May 19, 2015 09:25:17 AM

The framework deal on Iran’s nuclear program is far from being realized and has numerous hiccups and enemies attached to it. However, most of media and political experts discuss it as a sealed deal. They even talk about its consequences. Most of them are talking about Saudi Arabia and Israel’s fate. And, of course, there are some analysts who have concerns over the relations between Iran and Russia.

Russia would like to keep Iran under sanctions

Most of the experts believe that the deal itself is unfavorable for Russia, and that Moscow would like to keep Iran under sanctions. Undoubtedly, Russia is interested in keeping the current status quo for as long as it’s possible, which had a lot of limitations imposed on Iran and Moscow was the only partner for Tehran.

However, it must be pointed out that such status quo was extremely volatile and the situation could spiral to either a direct war between the US and Iran or a war in Syria. And no matter how the war would have ended, it would destabilize the Middle East and the global economy as a whole. That’s why the framework deal is the least evil of all for Russia.

It must be understood, however, that the Iran framework deal doesn’t mean a Russia’s sudden rapprochement with Iran from one side, and with the West from the other. As for the US, it’s difficult to predict any sudden renewal of economic relations as they have been deteriorated ever since the Iranian revolution.

And the two countries can’t really establish relations anew as it must be first approved by the Congress, while the lifting of economic sanctions against Iran is not even in the cards now. The US President Barack Obama will consider himself lucky if he can at least convince the Republican Congress to not halt the nuclear deal.

The Europeans are going to attempt entering the Iranian market and drive out the Russian as well as Chinese companies. However, the Iran’s interest of having close cooperation with Europe should not be exaggerated.

The majority of Iranian establishment backs the talks efforts only because it wants the economic sanctions to be lifted. The Iranian conservators are not interested in building close political-economic relations with the West. They believe that the more Iran opens up to the Western world, the more chances for the country to have a ‘color revolution’, which would bring down the current regime in place.

Iran’s entering of external markets would lower the prices of crude oil

According to other political experts, another Russia’s fear is that lifting the sanctions against Iran would result in entering of external markets by the Iranian fossil fuels, which therefore would lower their prices.

And the experts are partially right – well, at least when it comes to crude oil – the Iranians have promised to dramatically increase the export of crude oil right after the sanctions are lifted.

As of now, Iran exports about 1 million barrels of oil a day and after the sanctions are lifted, it plans to double the number and even come back to the pre-sanction number of exporting 2.5 million barrels of oil a day.

According Mohsen Qamsari, the director for international affairs of the National Iranian Oil Company (NIOC), Iran can ship almost half of the supplies of oil that it provided to the European market before.

“The contracts will be clinched on the basis of spot deals until the European clients finish their existing annual import contracts and are ready for new contracts,” Qamsari said.

However, the only possible hiccup for the crude oil export might be a gradual, not the ‘full and at once’, lifting of the sanctions as well as Iran’s unwillingness to sell oil at such a low price.

Iran might try destabilizing the situation in the Middle East

As a matter of fact, as Saudi Arabia privatized the Iranian quota, Iran might try to take it back either through the process of talks or through destabilizing the situation in Yemen as well as Saudi Arabia.

As for the export of the Iranian oil to EU through the Nabucco-West pipeline, which is an ‘enemy’ to Gazprom, experts claim that it would become possible only in a decade or so.

Iran must build a pipeline network from its South deposits to the Turkish border, normalize its relations with Turkey, improve energy efficiency of its production sector in order to not consumer so much gas. However, a lot might change within the next 10 years, especially given the fact that this is the Middle East we are talking about.

And finally, another Russia’s fear is that after Iran is liberated from the sanctions, Russia is going to lose a significant share of its influence in the Middle East. Until recently, it really seemed so: Iran was the main partner of Russia in the region, and the inevitable worsening of the relations between Moscow and Tehran after Russia stopped being a single-source partner, would decrease Russia’s presence in the Middle East.

The number of nuclear clients of Russia is also decreasing by the second. Ukraine, which has been the top client of the Russia’s nuclear sector, is posed to develop a cooperation with the US companies in order to upgrade its own nuclear infrastructure.

However, during the last couple of years, Russian authorities have managed to find alternative partners largely thanks to its unhinged position on Syria’s matters. Russia has been reached out by countries – such as Egypt – that are looking to diversify their relations with the US. Furthermore, Russia has managed to improve its diplomatic relations with Saudi Arabia and the Persian Gulf countries.

So now, Iran is particularly not interested in ending relations with Russia and letting it freely operate in the region.

nf

Save The Oil, Shiite Oil (Revelation 6:6)

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Here’s why Iran and Iraq should worry OPEC

Stephen Sedgwick | @steve_sedgwick
Tuesday, 12 May 2015 | 6:01 AM ET

Oil Iraq OPEC

Atef Hassan | Reuters

Caveat emptor! The big Organization of Petroleum Exporting Countries (OPEC) summer pow-wow is only 24 days away now and ceteris paribus we should see a continuation of the status quo. Right that’s enough Latin, the only languages that really count at the meeting will be Arabic, Farsi, Kurdish and money, namely petrodollars.

As far as I can see, this one is about how Saudi Arabia, Iran and Iraq solve a growing problem of how you cap OPEC production – and thereby falling prices – at a time when Baghdad and Tehran are desperate to up output.

Despite the rally from the mid-$40 region, OPEC could be hundreds of billions light in terms of revenues this year causing some to once again trot out the old, tired and inaccurate line that OPEC is losing its importance in world energy supply.

I even read a report under the headline ‘OPEC going broke…’ Really?

Well no-one is doubting that the loose alliance is fractured, sometimes dysfunctional and limited in its adherence to stated production levels but going broke and irrelevant? Dream on.

What is clear though is that some countries desperately need the petro-dollars that would come from increased production. Iran and Iraq are not only near the top of that list but also have the capacity to ratchet up their levels, albeit with the caveat in Iran’s case of completing nuclear talks.

Bernstein Research has just put out a briefing on the importance of Iraqi and Iranian production ahead of the OPEC meeting on 5th June and amid the reams of statistics I pulled out a few. And if you think it’s only Saudi Arabia that matters then look again at these numbers on Iran and Iraq:-

Iran has 1 percent of global population but an estimated 157 billion barrels of proven crude oil reserves.

The Iranian number equates to 9.5 percent of world total and is fourth largest amongst all countries after Venezuela, Saudi Arabia and Canada.

Iran also has the second-largest proven gas reserves at 1,193 trillion cubic feet – 17 percent of the world’s resources and 35 percent of OPEC’s.

And the Iraqi numbers are not to be sniffed at either:-

Iraq comes close with 144 billion barrels of proved crude oil reserves.

The Iraqi figure equates to 9 percent of the world total and is fifth largest globally.

Iraq is the second-largest OPEC producer currently, producing 3.4 million barrels per day, equating to 4.3 percent of the world total.

To put this in context, Bernstein’s report says there are roughly 1,6 trillion barrels of proven oil reserves in the world.

So Iran and Iraq are potentially the major players who could upset not only OPEC equilibrium with their challenge to number one producer Saudi but have the ability to put the skids under the big rally in oil off the March lows.

Follow Steve on Twitter: @steve_sedgwick

The Nuclear Race Has Already Threatened US Oil (Rev 6:6)

This Nuclear Arms Race Could Further Threaten the U.S. Oil Industry

While the world watches as Iran and the U.S., along with five other world powers — the so-called “P5+1″ — negotiate a deal regarding the country’s nuclear ambitions, fellow Middle-East power Saudi Arabia isn’t sitting still. The Saudis have actually been working on developing energy from alternatives to oil since former King Abdullah established a center for atomic and alternative energy in 2010.

Raising the ante, the country recently signed a nuclear cooperation agreement with South Korea, even as rival Iran inches closer to an agreement to allow it to continue its own nuclear ambitions. A recent Wall Street Journal article even brought up the potential risk of Saudi Arabia using its partnership with Pakistan to have access to nuclear weapons as a response to the threat of a nuclear Iran.

These are real concerns; but nuclear proliferation has been a world risk for 70 years now, since the U.S. developed the first hydrogen bomb. I don’t want to downplay that risk; however, there’s another side to this story that shouldn’t be ignored. It may have very real economic consequences for the American oil industry, which is not an insignificant part of the U.S. economy, and has been one of the brightest spots in our jobs recovery.

Oil: U.S production has replaced Iranian market share 

In 2011, Iran exported 2.5 million barrels of oil per day. By 2013, exports had plummeted to 1.1 mmb/d following sanctions based on the country’s continued attempts to develop nuclear technology. Iran exported roughly 1.4 mmb/d in 2014.

At the same time, American shale production was cranking into high gear. In 2013, U.S. oil production was 7.45 mmb/d, and increased an astonishing 1.2 mmb/d last year. Considering that oil is a largely global commodity, it’s not much of a stretch to view U.S. production growth as essentially offsetting the cuts to Iranian output in recent years.

Of course, oil prices have declined more than 50% since last June, largely because global production has grown faster than demand:
Brent Crude Oil Spot Price Chart

That’s happened without more than 1 million daily barrels of Iranian oil, which could be coming back online very soon.

American oil hits fresh lows even as Iran prepares to turn the pumps back on

On March 19, West Texas Intermediate, a common benchmark for U.S.-produced oil prices, almost fell below $43/bbl, and has been trading near or below its low since the 2009 recession for much of the past week. This has been driven by concerns that U.S. production has continued to grow even as the oil market remains oversupplied.

Iran’s nuclear program has been around for 35 years. The U.S. was instrumental in its early days, and even American utilities used it to market nuclear power as safe.

At the same time, the negotiations with Iran could lead to the country pouring hundreds of thousands of new barrels of supply into an already oversupplied market,  as soon as this summer. The country is starving for cash, and even with Brent crude — the international benchmark — trading below $55 per barrel, Iran could pour as much as 1 million barrels per day in new supply into the market “within a few months,” according to Iranian Oil Minister Bijan Zanganeh.

At the same time, American oil producers have reduced spending on development of new wells by tens of billions of dollars since late 2014. This has resulted in significant cuts in drilling activity so far this year. Through March 16, there were almost 600 fewer drilling rigs operating in oil fields in the U.S., more than a 40% reduction from year-ago levels.

However, the drilling cuts are yet to materially affect oil production, which is actually up so far in 2015. This is why, after a slight rebound in oil prices in late January and early February, prices have been steadily falling, on concerns about the continual oversupply in the global and domestic oil market.

Impact on U.S. oil producers 

While it’s been slow to materialize, American oil output is expected to begin flattening in the next few months. Though it’s unclear if production will actually decrease, at this point, flat U.S. production would likely reestablish some balance in the market, and lead to a recovery in oil prices. The Iran situation could significantly change the game, though.

The way things are unfolding, Iran would begin ramping up its production just as U.S. output stabilizes, meaning the current global oversupply continues. This would very likely keep oil prices down for an impossible-to-determine period of time.

The impact of oversupply — without all that extra Iranian oil —  is already being felt on U.S. producers’ stocks:

XOP Chart

XOP data by YCharts.

The Dow Jones U.S. Select Oil Exploration and Production Index has declined 27% since oil prices peaked in June; but it’s important to note that this index isn’t really a good measure of U.S. producers. As a starting point, it’s market-cap weighted, which means that ConocoPhillips, a U.S.-based international producer, makes up 13% of the index, while several refiners — which can actually benefit from falling oil prices — make up another 18% of the index. The SPDR S&P Oil & Gas Explore & Prod. (ETF)  (NYSEMKT: XOP  ) , on the other hand, is almost exclusively made up of independent U.S. producers, which are bearing the full brunt of falling oil prices.

While the majority of U.S. producers have enough capital to ride out the current environment, Iran’s million-barrel addition to the market could change the dynamic quickly for producers with limited resources. Even the best-managed and capitalized producers would likely be forced to make further cuts to drilling, and potentially, even some marginal production if prices stay low for an extended period of time.

While low oil prices are good for consumers, because oil is used for everything from a feedstock for manufacturing to the primary fuel for shipping, cheap oil means lower prices. However, there has already been some impact on domestic jobs in the industry, while many states that depend on taxes from oil producers will also feel a pinch. The double whammy here is more people potentially depending on government assistance, while the resources that help fund those services falls.
Looking ahead: Realities, unknowables, and operating based on likelihoods 
Many in the industry doubt just how much sustained production Iran could generate at this point, because the country quite frankly hasn’t had the money to invest in maintaining its oilfields with the current sanctions in place. Many in the industry doubt that it could sustainably produce 800,000 bbl/d at this point, and that it could take a year or more for the necessary investments to get the country to even that point on a sustained basis.

However, there’s little reason to doubt that the international community and Iran are likely, at this point, to reach an agreement that allows the country to turn the oil pumps back on, increase exports substantially, and reclaim its former place as the No. 2 OPEC producer behind its rival Saudi Arabia. While only time will tell how quickly — and how much — Iran can scale up its oil production, it’s not likely going to be a good thing for U.S oil producers.

That, in turn, is likely to be harmful for investors looking for a rebound in oil producer stocks, and further the damage to those already investing in the industry.


Oil pumpjack near Midland, Texas.