Business, Finance & Economics

Iranian oil won't flood the market as quickly as you might think

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Iranian President Hassan Rouhani attends a news conference in Rome, Italy, on Jan. 27, 2016. 

Credit:

Alessandro Bianchi

Now that crippling sanctions have been mostly lifted, Iran is wasting no time drumming up trade and investment to get its wretched economy back on its feet.

Oil is a key part of its planned revival.

Iran has massive energy reserves: The Islamic Republic holds the world’s second-largest natural gas reserves and the fourth-largest crude oil reserves. And its leaders have vowed to ramp up exports as quickly as possible.

To that end, Iranian President Hassan Rouhani has been in Italy and France this week reestablishing relations with old customers and signing billions of dollars in business and trade deals, including agreements to export oil and upgrade creaky energy infrastructure.

"Let's forget past differences and start anew," Rouhani told business leaders in France.

But the prospect of Iranian oil flooding an already oversupplied global market has not been welcomed by everyone outside of Iran. It’s one of the reasons crude oil prices plunged below $30 a barrel for the first time in 12 years recently.

More from GlobalPost: The lowest oil prices since 2003, explained

Shortly after the lifting of major sanctions on Jan. 16, which followed confirmation that Iran had rolled back its nuclear program in accordance with a landmark agreement struck last summer, Tehran said it would increase its crude oil exports by 500,000 barrels per day (bpd).

Before the world rings in 2017, it plans to increase shipments by an additional 500,000 bpd.

That news sent shockwaves through international crude oil markets, as the International Energy Agency forecast that global oil supply could exceed demand by 1.5 million bpd in the first half of 2016 and warned the oil market could “drown in over-supply.”

Iranian workers at the South Pars Gas field in Asalouyeh Seaport, Iran on November 19, 2015.

It's understandable that Tehran, which used to be the second-largest OPEC producer, wants to reclaim market share lost to its rivals during years of economic isolation.

But some market observers are questioning the likelihood that Tehran will fulfill its ambitious plans, considering the current state of the global oil market and the huge investment required to get its production to such levels.

Iran currently produces around 3.1 million bpd, of which 1.1 million bpd are exported. Tehran has said it needs $100 billion in investment to restore oil exports to pre-sanction levels of about 2.2 million bpd, but convincing some foreign companies that Iran is a good bet won’t be easy.

Investors are mindful that economic sanctions can be reinstated if Tehran reneges on its commitments made under the nuclear deal, potentially jeopardizing their business activities in the Islamic republic. 

Furthermore, plunging oil prices have forced energy producers around the world to slash spending and lay off thousands of workers as they weather the downturn in the sector. With prices expected to go as low as $20 or even $10 a barrel, is now the right time to be investing vast sums in Iran?

Even if Iran raises the funds, it will take time to get infrastructure in place. That won't be easy, or fast.

“We’re talking about opening oil fields, freshening up infrastructure, putting new capacity in place, new technology in fields,” Julius Walker, a senior energy consultant for Vienna-based research firm JBC Energy, told the LA Times.

“All of this is a question of time and not something that can happen in the very short term.”

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