April 14

Iraq, Iran and the Future of OPEC

OPEC

OPEC

With Iran and Iraq developing closer ties and the potential for sanctions targeting Iran to be lifted in the near future, the Organization of the Petroleum Exporting Countries (OPEC) may undergo a drastic transformation. Currently, Saudi Arabia is OPECs top oil producer, followed by Iraq and Iran respectively. However, should Iraq’s security situation improve and should the United Nations Security Council (UNSC) lift sanctions targeting Iran’s petrol sector, Saudi Arabia may be in danger of losing its position as the organizations top oil exporter.
This shift in oil production could have a host of implications for both OPEC and the world; for the former, it will mean that both Iran and Iraq will exercise more authority within the organization and could lead to potential production wars between OPEC members; for the later, it could result in a drastic reduction in global oil prices due to increased production and competition.

Currently Iraq and Iran‘s petrol sectors are underperforming. For Iraq, this is due to the country’s deteriorating security situation. Insurgents continue to attack oil installations throughout the country which has seriously disrupted its oil production. For instance, in March 2014, insurgents attacked the Iraq-Turkey pipeline; disrupting oil production in the north and preventing the export of crude oil via the Turkish port of Ceyhan. This led to Iraq’s oil production falling 200,000 b/d in March, with the country producing only 3.15 million b/d. However, in February, Iraq’s oil production had hit its highest level in 30 years. Should Iraq improve its security situation, its production and refinement capabilities could eventually surpass those of Saudi Arabia.

For Iran, sanctions targeting the countries petrol sector have suppressed the nation’s production and refinement capabilities. In March 2014, Iran’s oil production was 2.85 million b/d. This number represents only a fraction of Iran’s production potential. Due to restrictions, foreign investors have been unable to invest in Iran’s oil industry. Should sanctions, which have prevented FDI in Iran’s petrol sector, get lifted, Iran’s oil production will most likely skyrocket as a result. Iran has already made it very clear to other OPEC members that its goal, according to Iranian Oil Minister Bijan Zanganeh, is to produce roughly 4 million b/d this year. Without sanctions holding back both Iran and potential investors, Iran’s oil production will most likely rise much higher than its current goal.

While Saudi Arabia produced 9.6 million b/d this March (the highest of any OPEC member) if Iraq and Iran overcome the obstacles which have kept them from living up to their full production potential they may both come close to, or potentially surpass this number. Iraq does not currently have a production quota (due to the country needing to rebuild its economy following the U.S. led war) and should its security situation improve, the flow of FDI and the ability to produce oil without disruption will significantly increase its b/d production capacity. Iran has simply made it clear that it has no desire to adhere to production limitations. Should sanctions targeting its petrol sector be lifted, Iran will most likely seek to maximize its b/d production capacity with little regard to OPEC production quotas.

This scenario will most likely lead to a production war within OPEC. Saudi Arabia and other OPEC members will have to increase their daily oil production to maximize profits as oil prices will drop drastically; should Iraq, Iran and Libya’s oil output significantly rise. While OPEC is currently drafting a plan to deal with increased production (claiming it will be able to absorb the increased oil production of Iraq, Iran and Libya) these measures will prove insufficient in maintaining current oil prices as production will likely top OPECS current 30 million b/d ceiling. This drop in oil prices will, besides creating a production war, lead to increased tensions among OPEC members and could, in the worst case scenario, result in the dissolution or restructuring of the organization. It is possible, given the growing cooperation between Iraq and Iran, that the two may choose to leave OPEC and come to a bilateral oil production agreement.

The Energy Information Administration (EIA) currently predicts crude oil will average $96/bbl in 2014. However, this number will be much lower should Iraq, Iran and Libya manage to boost production; a move which, besides leading to a drastic reduction in global oil prices, could have serious implications for OPEC, the global oil market and the politics of the Middle East and the Levant.

Bibliography
McGraw Hill. (2014). OPEC Production Estimates. Retrieved from PLATTS: http://www.platts.com/news-feature/2014/oil/opec-guide/prod_table