Iran's Uncertain Times

The Singapore-based Facts Global Energy yesterday released a report that had many dire predictions regarding Iran's ability to produce and export oil.  The report argues that despite Iran's own projections of bringing oil production up to 5 million barrels a day after 2015, the country is likely to see production decline to 3 million a day by 2015.  The report cites Iran's abysmal record attracting foreign investment, its growing inability to technically handle recovery in its own fields, and the combined impact of sanctions--driving away interest from legitimate businesses--and the global credit crunch has had on Iran's ability to find financial partners to begin the work of upgrading its oil facilities.  The numbers seem pretty incredible given that FGEnergy's estimates mean that Iran will be looking at a one million barrel per day decline in the next 7 years if it does nothing but maintain the current status quo.  That rate of decline seems even greater than widely recognized disappearing producers such as Syria, Yemen, and Oman.  The icing on the cake here is that the report suggests that if domestic refining capacity does come on line during this time frame, OPEC's second largest producer may cease exporting oil entirely.  

Even if FGEnergy's analysis is alarmist in its time horizon, no one argues that Iran has put itself on a path of self-destruction that can only eventually end up where FGEnergy predicts.  And the reckoning may happen even more quickly than Iran could have imagined or hoped.  During the heyday of high oil prices, a few short months ago, Iran could afford fiscal mismanagement and increasing isolation from international creditors.  A back of the envelope estimate by a respected group of economic modelers estimated last year that Iran's "break even" point budget wise was about $60/barrel.  That made it one of the most expensive countries within OPEC, but with oil spending most of its trading days of 2008 above $100/barrel, the Iranian government could breath somewhat easily.  With oil today at $45/barrel (representing a $3 increase I might add over recent trading), the situation becomes remarkably different.  Iran will need to pay attention to how and when it spends and on whom it relies for trade and investment.  Relying on Sinopec and the Chinese willingness to flaunt the US and to a lesser extent Europe's interest in isolating Iran may not be quite as easy to do in current global circumstances.  And as the Chinese look at contraction at home, defending Iran may become more of a nuisance than it's worth.

All of this, ironically, places the incoming Obama administration in a unique position.  Some analysts posit that Ahmedinejad's letter to the president-elect after Election Day this November could signal an opening salvo of interest in talking with the United States.  Certainly, the Iranians are in an economically sensitive, if not vulnerable, position right now.  Using a well crafted carrot might produce some interesting results.