Political disruptions can significantly impact global oil production. Iran’s re-entrance into the global oil market with the lifting of the bans imposed by the US has prompted Saudi Arabia to reject production cuts. The “disastrous Iran Deal” signed by the Obama administration has dramatically impacted Global Oil Production: it has opened up Iran’s huge crude oil reserve to the global oil market. Global oil production totals 97.42 million barrels per day of which the entire world uses about 96.99 million barrels of oil per day. The extra half million barrel has so much to do with so many things that directly impact the global geopolitical landscape. President Trump’s campaign promise to reject the Iran deal, if he really does so, would have serious geopolitical implications. Regional tensions in the Persian Gulf with Iran renewing its deals with Russia and enriching its nuclear power would further destabilize the Middle East. President Trump’s special connections with Russia is likely to redraw the global power structure that would put Iran, China and their allies in one side. Saudi Arabia’s historical rivalry against Iran and its discomfort with Putin-Assad ties will open up scopes for a never-ending diplomatic game.
Global Oil Production and World Politics:
The European Union and the United States lifted nuclear-related economic sanctions imposed on Iran after the International Atomic Energy Agency announced that Iran has met all obligations under the nuclear agreement. After a long time, Iran has joined global oil production and fulfilled its pre-sanctions target of 4 Mbd and aims at pumping 5.7 Mbd by 2018. If this steady supply continues, as energy analysts forecast, crude oil prices will remain at USD 50-60/bbl despite the speculated demand rise. This is certainly bad news for Russia and Saudi Arabia: Russian economy is stagnant due to the imposed sanctions and the low crude oil price whereas Saudi Arabia has already burnt 16% of its $737 billion foreign reserve.
Saudi Arabia and OPEC Production Cuts:
The falling crude-oil price has pushed Venezuela on the fringe of bankruptcy and forced Nigeria request for loans from IMF and World Bank. The easiest way to handle this dire situation is to curb supply to the global oil market and artificially increase the demand. Saudi Arabia, as the major exporter of crude oil, rejects this strategy as it has a robust foreign reserve. As oil export quota is met by market share, Saudi Arabia has been defending its share by pumping record volumes with the hope that the declining oil price will kick the American Shale Oil out of the market. However, proving all speculations wrong, the fracking industry innovated new technologies that significantly reduced the production cost and made America less dependent on OPEC. Moreover, Iran’s re-entrance into the global oil production has complicated the issue even further. Historically Iran-Saudi relation has been turmoiled with rivalry and distrust of each other, and Saudi Arabia always wants Iran cornered in the global community. For Saudi Arabia, an isolated Iran with or without nuclear power is much preferable than a competitive oil producer and responsible regional power. The Iran Deal transformed Iran from a rouge state to a more reliable partner in the global arena. However, as Saudi Arabia enjoys the lowest crude-oil production cost in the world, it rejected slowing down production to readjust the falling oil price. Saudi’s resistance to production cutbacks reflects its desire to strike a blow to Iran and Russia for their support of Bashar Al Assad. Saudi Arabia is ready to accept and withstand the long-term price decline with the hope that it would cripple the Russian and Iranian economy.
Global Oil Production and International Relations:
The Joint Comprehensive Plan of Action, as the deal is officially called, was forced by President Obama through executive order. As it was not ratified by Congress, Trump can repeal it at any moment. Although Trump called the deal “stupid” and “a disgrace,” it would not be that easy to rescind it as EU reaffirmed its commitment to the Iran nuclear deal and reminded Trump that he can’t renegotiate or simply walk away. EU’s commitment to the Iran Deal is reflected in European oil companies move toward developing oil and gas fields in Iran: Royal Dutch Shell and Total announced massive investment in Iran. Like EU, China is also planning huge investment in Iran. If Trump backs out of the deal, US companies will lose potential business deals in Iran as the country is welcomed back into the global market. Like most of his campaign commitments, Trump’s promise of dismantling the Iran deal seems to be made only to be broken. Republican Senator Bob Corker reaffirmed this on Friday that Washington will not “tear up” the 2015 deal with Tehran after US President-elect Donald Trump assumes office on January 20.
2016 saw a declining crude oil price that continued throughout the year and, as energy analysts predict, the low price is likely to stretch beyond the 2020s. Russian economy is already stagnant, and Saudi Arabia has already been spending from its reserve. Despite Saudi Arabia’s disappointment with Russia’s relentless support to Syria, Saudi Energy Minister Khaled Al-Faleh and his Russian counterpart Alexander Novak reached a resolution to increase bilateral dialogue to control the global oil market. Both Russia and Saudi Arabia will put enormous effort in hiking the price, although trough different means. The recent Muslim immigration ban on Iran and the official notice from the Trump administration for the alleged missile launching might be understood as a diplomatic prologue to a more turbulent Iran-US relation in future. Saudi Arabia will certainly manipulate this situation to corner Iran by convincing the US in reenacting the previous bans so that Iran departs from the global oil production scene. However, China’s interest in Iran’s oil and the huge investment it has already made in constructing the Iran-Pakistan Pipeline also called Peace Pipeline will further complicate the international politics related to global oil production. Diplomatic approach to this complicated situation is less likely to reach any effective solutions. War is the next step when diplomacy fails, or rather succeeds!