Oil traders and others believe that the Saudi decision to let the price of oil tumble has more to do with Iran than economics.
Their belief has been reinforced in recent days as the Saudi oil minister has steadfastly refused calls for a special meeting of OPEC and announced that the nation is going to increase its production, which will send the price down even farther.
Saudi Oil Minister Ibrahim al-Naimi even said during a recent trip to India that oil prices are headed in the "right direction."
Not for the Iranians.
Moreover, the traders believe the Saudis are not doing this alone, that the other Sunni-dominated oil producing countries and the U.S. are working together, believing it will hurt majority-Shiite Iran economically and create a domestic crisis for Iranian President Mahmoud Ahmadinejad, whose popularity at home is on the wane. The traders also believe (with good reason) that the U.S. is trying to tighten the screws on Iran financially at the same time the Saudis are reducing the Islamic Republic’s oil revenues.
For the Saudis, who fear Iran’s religious, geopolitical and nuclear aspirations, the decision to lower the price of oil has a number of benefits, the biggest being to deprive Iran of hard currency. It also may create unrest in a country that is its rival on a number of levels and permits the Saudis to show the U.S. that military action may not be necessary.
The Saudis firmly and publicly deny this, saying it’s all about economics. Not everyone believes them.
“If under normal circumstances, the price of oil was falling this dramatically [17% in the last few months], Saudi Arabia would have already called for a special OPEC meeting,” says one oil trader. “It’s got to be something else and that something else has to be Iran.”
Costs higher in Iran
The trader notes that Iran, OPEC’s second largest producer, is “in trouble” both in the short and long term. Iran’s oil reserves, he notes, are declining more rapidly than Saudi Arabia’s and are more difficult to extract. While a barrel of oil costs the Saudis $2-3 to get out of the ground and to market, that same barrel costs Iran as much as $15-18.
“Iran does have some oil that costs them $8-10 but most of it is in that upper range,” he said.
Moreover, Iran has a large domestic market for oil, particularly fuel oil, which Saudi Arabia, with its smaller population and milder climate, does not.
Perhaps more important, because Iran has limited refining capability, it must import more than 40 percent its gasoline, making it the second largest importer of gasoline in the world after the United States, according to the Department of Energy’s Energy Information Agency.
And since Iran sells gasoline at a rate comparable to the rest of the Gulf states — around 33 cents a gallon — it must subsidize the price on a massive scale. In fact, say traders, Iran is paying about $1.50 per gallon to subsidize domestic gasoline consumption — the world market price of gasoline minus the tiny price per gallon — a practice that is costing Iran billions of dollars annually and eating up most of the state-run oil company’s discretionary funds.
Iran has other problems that make it vulnerable. Inflation is officially running at 17 percent, the highest since the revolution, and unemployment is at 11 percent. U.S. intelligence, though, believes the real figures are much higher, with inflation as high as 50 percent and joblessness much higher among the country's restless youth). In addition, capital outflow is estimated at $50 billion annually and budget deficits are a chronic problem, leading to overseas borrowing.
And none of this takes into account the possibility that the United Nations will impose harsher sanctions if Iran continues its work on nuclear weapons technology.
There are domestic political consequences to such a convergence, note traders and officials in both the U.S. and Iran. Ahmadinejad was elected on campaign promises that he would end corruption and better distribute the nation’s oil wealth. He has been unable to do either; now, with declining oil revenues, his job will be even more difficult.
One sign of this is the street demonstrations he has faced each time his administration has so much as floated the suggestion of a small increase in the price of gasoline. To counter his inability to fulfill his domestic promises, Ahmadinejad has played the nationalism/nuclear card, accusing the West of trying to stifle Iran’s legitimate energy needs.
How long and how successfully he can play these cards is debatable. Municipal elections last month unveiled a lot of dissatisfaction as opposition parties swept through municipal majlises throughout the country. His rival in the 2005 presidential election, Akbar Hashemi-Rafsanjani, has criticized him publicly for the first time, as have others close to Supreme Leader Ayatollah Khamenei. Student demonstrations and local newspapers are becoming increasingly critical of the “dictator.”
Meanhwhile, the Bush administration is only too happy to see Ahmadinejad's deteriorating domestic situation — and to let the Saudis further turn the screws. Moreover, administration officials are hinting they will be applying financial pressures to complement the Saudis. (As one official said recently, Iran cannot operate in the oil markets without using dollars.)
The officials did not reveal how the pressures would work, but said they are underway. The U.S. blacklisted the state-owned Bank Sepah, Iran’s fifth largest, in recent weeks and last month, Iranian Oil Minister Kazem Vaziri-Hamaneh acknowledged having difficulties in financing oil projects. Commerzbank of Germany also has announced that it will no longer handle dollar-currency transactions for Iranian banks at its New York branch.
One trader is convinced that the U.S. and Saudis sealed a secretive deal on Iran when Vice President Dick Cheney met with King Abdullah in what appeared to be a hastily arranged summit in Riyadh in late November 2006. There have been lower-profile meetings as well that could have dealt with the arrangement.
Long term, traders say that the Iranian oil will become even more expensive, if not impossible, to extract because Iran does not have access to up-to-date exploration and drilling equipment. Only two countries, the U.S. and Canada, manufacture the equipment needed for the job and they simply do not sell to Iran. Iranian attempts to get the Japanese to sell some of their equipment — not the same quality as the North American equipment but adequate — failed when the U.S. pressured the Japanese.
The biggest field discovered in the past 35 years, at Azadegan, near the Iraqi border, is considered “geologically complex,” according to the U.S. Energy Information Administration, and thus will be costly to develop. The lower world oil prices, the more difficult it becomes to make the field profitable and to get foreign investors to do complicated joint ventures with the national oil company.
Rafsanjani is known to believe that Iran should not continue to anger the U.S. and should align itself with the Americans in a fight against the Sunnis, an opportunity that is slipping away as Iran angers the U.S. in Iraq and on the nuclear front. And this week, reformist Ayatollah Hossein Ali Montazeri joined in the criticism.
For the U.S. and Saudis, this can only be seen as good news.
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