OPEC Crisis

12/17/2013 02:44 pm ET | Updated Feb 16, 2014

Islamic Republic of Iran Threatens to Lower OPEC Oil Prices

Shortly after the four-page, six-month long nuclear deal was reached between p5+1 (United States, Russia, France, China, Britain and Germany) and the Islamic Republic of Iran (and after some signs pointing towards the easing of sanctions on Tehran), Iranian authorities have become more assertive and authoritative in increasing their influence in regional and international arenas, not only geopolitically but also economically.

This week, ahead of the upcoming OPEC meeting, Iran threatened to trigger a price war in the global oil markets. Iranian authorities warned OPEC's 12 members (including Iraq, Kuwait, Iran, Saudi Arabia and Venezuela) that Tehran would raise its oil output even if prices of crude oil tumble to $20 a barrel on the global market.

Before going into a series of closed meetings, Iran's Oil Minister Bijan Zangeneh said, "Under any circumstances we will reach four million barrels per day, even if the price of oil falls to $20 per barrel," adding, "we will not give up our rights on this issue."

Empowered by the temporary nuclear agreement reached two weeks ago, Iranian leaders are aiming to increase their oil sales from nearly 2.5 million barrels a day to four million, and to regain their No. 2 position in OPEC. In addition, Iran has put forward a candidate for the position of OPEC Secretary General, who is considered as the voice of the OPEC organization between meetings. Currently, Libya's Abdullah Al-Badry serves that role.

Economic Consequences on the Global Oil Market

Saudi Arabia, the world's largest oil exporter and de facto leader of the oil cartel, with Venzuela have been successfully capable in managing the production of oil at OPEC (with the help of other OPEC members). This must be conducted according to Brent crude, a global benchmark, so that the supply and demand are balanced; prices have not gone less than $100 a barrel, with prices hitting a two-month high of more than $113 per barrel. Two members of OPEC, Saudi Arabia and Venezuela have pointed out they are seeking to keep a target production of 30 million barrels per day in order to avoid a sudden decrease in oil prices, as well as to balance the supply and demand more efficiently.

On the other hand, the new warnings from Iran will not only put pressure on Saudi Arabia, but also on other members of OPEC that are trying to keep the status quo in check, with the price of the oil above $110 per barrel. The Iranian Oil Minister is insisting in pumping his country's oil into the global market with approximately an extra three million barrels per day, without taking into consideration the negative consequences that would arise, especially for other OPEC members and the global oil market. The supply of oil, as a result, will increase in comparison to its demand on the global market. Consequently, this will lead to a considerable amount of decrease in oil prices in Benchmark Brent crude on international markets, thus leading to less revenue for OPEC members.

The point that Iranian authorities, including Zangeneh, are making, is that Tehran will ratchet up oil sales "even if the price of oil falls to $20 per barrel"-- suggesting that benchmark Brent crude on international markets will drop by approximately six times of what is currently being sold. This will leave the oil exporters in a very strenuous situation, with production costs likely outstripping oil sales revenue. Benchmark Brent crude was already trading down nearly 43 cents at $112.19 a barrel after Iranian leaders warned about pumping millions of barrels of oil into the international market. Although many countries are brushing off Iran's threat, these warnings and remarks can still affect the oil global market.

Domestically speaking, Iranian authorities have been trying to use these nuclear negotiations to lure back western oil companies. Mehdi Hosseini, an adviser to Iran's Oil Minister, was previously quoted in the Financial Times as saying that the Iranian government was developing a "win-win" form of contract, which could benefit leading western and eastern companies alike. The Iranian government is trying, according to Hosseini, to also change the current system of buyback contracts, which currently do not permit foreign companies to book reserves or take equity stakes in Iranian oil, gas, or other projects. This can be seen as a major shift in Iran's oil industry, which has been exposed to little foreign investment in its oil and gas fields due to international sanctions, as well as its hostile position on foreign investment in the Islamic Republic.

Geopolitical Tensions Beside Economic Crisis

If Iran does not respect individual targets of oil sales in the global market and the quotas assigned by OPEC members, Tehran's attempts can definitely result in an oil glut. This will not only be limited to the economy, but it would lead to an increase in geopolitical tensions in the region, particularly among OPEC members.

Zanganeh's message to the OPEC members to "not fight" with Iran's intentions to pump millions of extra barrels a day into the international oil market indicates that Tehran is working towards reclaiming its No. 2 spot, regardless of the economic repercussions that it would have on other countries.

For many, the easing sanctions of P5+1 on Iran, and the recent nuclear deal, have already given Tehran the freedom to increase its influence in the region economically and politically. The issue of Iran taking an aggressive stance, as many media outlets and analysts have claimed, will put a great deal of pressure on the OPEC members economically. Iranian leaders attempts to pump oil into the global market, regardless of the wishes of other OPEC members, will spark further political tension in the region.

Majid Rafizadeh, a scholar and political scientist, is president of International American Council on the Middle East. He can reached at rafizadeh@fas.harvard.edu or @majidrafizadeh

A version of this article was first appeared in Alarabiya.

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