Well, that didn't take long. Just three days after the election of hardliner Mahmoud Ahmadinejad as the new President of Iran, oil prices are soaring once again. Today, the price of light, sweet crude on the NYMEX increased by 70 cents, smashing through $60 per barrel for the first time ever, in part on fears about the future of Iran's oil exports. Based on early indications and statements by Ahmadinejad, these fears appear to have at least some basis in reality. The question is, how much basis? The following are a few factors that could adversely impact Iran's oil production and/or exports, possibly in a serious way, in coming months and years. If you're at all worried about a $100-per-barrel/$3.50 per gallon gasoline price scenario unfolding, keep a close watch on:The problem is that Iran badly needs foreign investment in order to increase its oil production capacity significantly. Iran produced 6 million barrels per day of crude oil in 1974, but has not surpassed 3.9 million barrels per day on an annual basis since the 1978/79 Iranian revolution. Iran has ambitious plans to increase national oil production, from around 4.1 million barrels per day now to more than 5 million barrels per day by 2009 and 7 million barrels per day by 2024. The country is counting on billions of dollars in foreign investment to accomplish this, but this is unlikely to be achieved if it the leadership of the country is not open to it.
More broadly, Ahmadinejad has made it clear that he is not a friend to economic liberalization in general, including foreign investment. This could very well slow or even halt the tentative, sporadic economic reform efforts pursued under President Mohammed Khatami since 1997. In May 2002, the country's Expediency Council had approved the "Law on the Attraction and Protection of Foreign Investment," aimed at encouraging foreign investment by streamlining procedures, guaranteeing profit repatriation, etc. This law represented the first foreign investment act passed by Iran's Majlis since the 1978/79 revolution. Implementation of the law, however, was stymied by disagreements between reformers and conservatives. Needless to say, with the hardliners firmly in charge now, foreign investors - including international oil companies - are worried.
2) "Medieval economics:" Ahmadinejad vows that "people must see their share of oil money in their daily lives." The fact is, however, that Iran already heavily subsidizes energy to its citizens (currently, gasoline costs less than 40 cents per gallon in Iran, far below market cost). And this has led to rapidly increasing Iranian oil consumption over the past few years, up about 370,000 barrels per day since 2000. At the same time, Iran's oil production has increased about 460,000 barrels per day, meaning that Iran's net oil exports have increased only slightly, from 2.5 million barrels per day in 2000 to 2.6 million barrels per day currently. In other words, booming Iranian domestic oil consumption is cannibilizing Iranian oil exports, and this trend is likely to accelerate under Ahmadinejad's populist policies. The net result of increased Iranian fuel subsidies, all else being equal? Less oil for world markets and higher oil prices.
Populist economic policies, or as some critics call them "medieval economics," could also backfire in other ways and hurt the country's energy sector. For instance, shutting down Tehran's "ungodly" stock exchange (as Ahmadinejad had promised at one point to do), slashing interest rates, and handing over large state enterprises to the poor could lead to a disintegration of Iran's economy in general, scare off investors, and cause oil output -- and exports -- to fall. All else being equal, that would mean higher oil prices for you and me.
3) Iran's nuclear program: Iran has been pursuing a program of nuclear power since at least 1974. Now, with Russia's help, Iran is close to completing its first nuclear reactor at Bushehr, a development that has been strongly opposed by the United States. Besides Bushehr, Iran anounced in February 2003 that it had begun mining uranium deposits at Saghand near the central Iranian city of Yazd, and also that it was constructing a uranium enrichment facility at Natanz, 200 miles southeast of Tehran. According to the US Energy Information Administration report on Iran:
In March 2003, International Atomic Energy Agency (IAEA) inspectors examined Natanz and described it as "impressive." Other news reports indicated that Natanz was "extremely advanced" and involved "hundreds" of gas centrifuges for producing enriched uranium. Some analysts believe that Yazd and Natanz are part of an Iranian effort to attain self-sufficiency in the entire nuclear fuel cycle. Besides Natanz, the IAEA also has expressed interest in inspecting a heavy-water plant at Arak.
Obviously, all this has raised suspicions about Iran's nuclear intentions -- are they aimed at generating electricity, at building nuclear bombs, or both? Making matters even more suspicious is the fact that Iran has the second-largest natural gas reserves in the world, and the third-largest oil reserves. So what does Iran need nuclear power for? Inquiring minds want to know.
Another question to ask about the Iranian nuclear program, which President Ahmadinejad has vowed to continue, is this: "what are the United States and Europe going to do about it, especially now that the elections are out of the way?" Four options spring to mind: a) do nothing and let Iran "go nuclear;" b) increase diplomatic pressure on Iran to back down; c) reach some sort of compromise deal, wherein Iran provides assurances that its nuclear program is for peaceful purposes; d) ratchet up economic pressure, possibly through U.N. Security Council sanctions or other measures; and/or e) launch some sort of military action (with whatever military we have left, that is) against Iran's nuclear facilities. Except for "c," none of these are particularly pleasant options. Options "d" and "e" also have the potential for a major oil supply disruption from Iran, and the dreaded $100-per-barrel oil price scenario.
4) Potential upheaval in the Iranian oil sector: The Iranian President-elect says, without a great deal of subtlety, "I will cut the hands off the mafias of powers and factions who have a grasp on our oil, I stake my life on this" (hey, tell us how you REALLY feel!). In other words, Ahmadinejad is going after corruption and entrenched elites in the country's oil sector. This means that the "old guard," including oil minister Bijan Zanganeh, could be out of power, leading to a potentially rocky transition and possibly opposition by those very same entrenched elites.
All in all, Ahmadinejad's call for a radical shake-up of the country's oil sector could lead to a period of turmoil and lower oil output, most likely not nearly as bad as in the aftermath of the 1978/79 Iranian Revolution, but still potentially problematic. Back then, oil prices nearly tripled, from about $14 per barrel before the Revolution, to nearly $40 per barrel by early 1981. Even a doubling now would, of course, lead to $120 per barrel oil. Although highly unlikely to unfold in this way, the entire situation is certainly something to keep an eye on.
5) Iran's OPEC Policy: Iran, OPEC's second largest oil producer, already is considered one of that group's more "hawkish" members in terms of production quotas and pricing policy. Could Iran become even more of a hawk under President Ahmadinejad? Deborah White of Societe Generale SA in Paris says, "We are afraid that Iran will become more of an OPEC hardliner. If it's a more conservative government, they may decide to cut their production. It's like the transition to Ch?vez in Venezuela.'' (Ch?vez has been a leading price "hawk" in OPEC since he came to power in 1998, and has presided over a decline in Venezuelan oil output, from 3.3 million barrels per day then to 2.8 million barrels per day now.)
6) Regional Relations: How will Ahmadinejad's goal of making Iran into a "modern, advanced, powerful and Islamic" model affect regional relations? For instance, will Iran become more assertive vis-a-vis Iraq's Shi'ite population? What about Iran's relations with oil-rich Gulf Arab -- and Sunni Muslim -- states like Kuwait, the United Arab Emirates and Saudi Arabia? Could these deteriorate with a more revolutionary-minded President of Shi'ite Iran in power? Could any of this adversely affect regional stability or oil exports? Lots of questions, but few answers at this point.
7) Caveats and "Unknown Unknowns" It is important to point out that Ahmadinejad may not be able to carry out much of his agenda. The fact is, the Iranian Presidency is not the supreme decision making center in Iran; that role likes with Supreme Leader Ayotallah Ali Khamenei. In addition, there are multiple power centers in Iran -- the Guardian Council, the Expediency Council, the Majlis, the armed forces -- vying with each other for influence. Given this fact, it is at least as likely that the status quo will prevail than that Iran's oil sector will implode. The situation bears close scrutiny, however. As our good friend Don Rumsfeld might say, there are both "known unknowns" and "unknown unknowns" here. So stay tuned...and start shopping for a hybrid, fast!