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Friday, 24 July 2015
IMPLICATIONS OF IRAN NUCLEAR DEAL ON GLOBAL PRICES OF CRUDE OIL: EMPHASIS ON NIGERIA
By Frank Chukwuka Obianke Osimi
Article written and first published on Friday, 24 July 2015.
This article attempts a look at the possible economic implications of Iran Nuclear Deal on the global prices of crude. Precisely, the article attempts to forecast the implications of the deal on the global prices of crude oil, with particular emphasis on Nigeria for two reasons.
First, Nigeria is one of those few states in the world that rely heavily on foreign revenues earned from exports of crude oil to service or finance her national life.
Second, the writer of this article is from Nigeria, interested in the progress and development of his ancestral country, and therefore, hopes to draw Nigeria’s attention to the possible negative effects or implications of the nuclear deal on the prices of crude oil, while also suggesting the way out of the possible economic stress, strain and suffocation that may arise from the the nuclear deal because of its ability to further bring down the prices of crude oil in the international market, which have been at a very low ebb in the past months.
The Islamic Republic of Iran reached a nuclear deal with six world superpowers, led by the United States, after months of difficult negotiations characterized by diplomatic intrigues and maneuverings. Under the Iran Nuclear Deal reached on 14 July, 2015, Iran is expected give up its nuclear program in exchange for sanctions relief. It is not the intention of this article to delve into details of the deal regarding its terms and conditions. However, the article takes a cursory look at the implications of the deal on the prices of crude oil in the international market. This is important for a proper and adequate understanding of the implication of the deal on Nigeria.
A very important aspect of the nuclear deal between Iran and major world powers is that it is capable of opening Iran’s crude oil reserves to the rest of the world. However, this is only possible when the US and the EU relax sanctions on Iran. This would no doubt, lead to increased production and exports by Iran and could further bring down the already low oil prices.
The lifting of sanctions on Iran by the US and other major world powers may not come almost immediately after the deal. This could come in 2016 depending on Iran’s co-operation. Once sanctions are lifted, Iran could finally start selling some of the roughly 30 to 37 million barrels of crude oil it currently has stored in large floating tankers off its coast.There would mean more supply of crude into the oil market and is capable of pushing down, modestly, on oil prices.
According to Sara Vakshouri (relying on Mees Extimates), between 2012 to 2015, oil production in Iran fell from about 3.6 to 2.6 million barrels per day as a result of crippling economic sanctions slammed on her by the West. Back in 2008, Iran produced some 4 million barrels of oil per day. By May 2015, that had fallen to just 2.8 million barrels per day. To put it in perspective, the entire world consumes about 90 million barrels per day; so, this is a significant amount.
Furthermore, according to VOX, Iran currently has 30 million barrels of crude oil stored at sea. On top of that, Iran has been facing difficulties selling the oil that it can still pump out particularly after the European Union imposed sanctions in 2012 that barred insurers from covering ships that carry Iranian oil. As a direct consequence of the crippling sanctions, Iran’s oil export plummeted from 2.6 million barrels per day in 2011 to down to 1.4 million barrels per day in 2014-with sales going mainly to China, India, Japan, South Korea and Turkey.
As had been indicated above, sanctions on Iran can only be lifted if she complied fully with the terms of the nuclear deal and gives up her nuclear enrichment programme. Not until this is done, the deal may remain a mere paper work without any practical effect. However, it is hoped that Iran would cooperate with the six major world powers it reached the deal with for sanctions to be lifted. There are fears in some quarters that Iran may default regarding her obligation to fulfilling her own part of the deal. To lend credence to this fears, just recently, precisely, Saturday 18th May, 2015, the Iranian Supreme Leader, Ayatollah Ali Khamenei, attacked the US (chanting death to America), Israel and their allies and won that ”Iran would not change her policies toward the US”.
On the part of the US, President Barack Obama, had won that he would veto the US Congress should it refused to give assent to the nuclear deal. The parliaments of the other major powers- Russia, China, France, United Kingdom and Germany also have to approve the deal for it to become active and effective.
Now, lets go to the business of this article.
All things been equal, if Iran fulfilled her own part of the deal by discontinuing her nuclear program, there is no doubt that the the US and the EU, would ease economic sanctions on her. The direct, but not necessarily immediate consequence of that, would be the opening of Iran’s oil industry to the rest of the world. This would mean increased production and export of crude oil to the international oil market. The price of crude oil has been very low in the past one year after an all-time high prices enjoyed by oil producing countries for almost one decade. However, if sanctions on Iran are lifted, her resumption of oil export to the world is capable of further pushing down the already low price of the product. This is in view of the consideration that more supply of oil into the already saturated world oil market could further crash prices of the commodity.
Furthermore, if the recent forecast for 2015 global crude prices raised by the World Bank is anything to go by, the prices of crude oil may remain low for the rest of 2015. The forecast is contained in the bank’s latest Commodity Market Outlook released on Wednesday 22nd May, 2015. According to it:
”Large inventories and rising output from OPEC members suggest prices will likely remain weak in the medium term”, said John Baffes, senoir economist and lead author of the report . The bank said Iran’s nuclear deal with the US and other leading governments, if ratified, would ease sanctions, including restrictions on oil exports from Iran.
Nigeria is an oil producing country and a member of the Organization of Petroleum Exporting Countries ( OPEC). As a country, Nigeria’s economy depends largely on revenues that accrue from export of crude oil to other countries. It is no longer news that price of crude oil has fallen drastically in the last one year or there about. The immediate and direct consequence of this on Nigeria is that her revenue base has dropped astronomically in the past months. This has created serious economic stress and strain for her as a sate. It has even reached an extent now that Nigeria as a state does not have the money to attend to state affairs and even pay salaries. It is not breaking news to say here that the federal government of Nigeria under the leadership of former President Jonathan borrowed over four hundred billion Nigerian Naira to pay salaries of federal workers. More so, many states and local governments in Nigeria cannot pay salaries of persons working for them and are therefore owing outstanding salaries. Not long ago, the federal government of Nigeria approved financial bail-out of over 400 billion Naira for states that have not paid their workers in the past months.
Nigeria’s financial woe is compounded by the fact that some of the leading economies of the world, such as the US, China and India, are no longer buying her oil like before quantity wise. The reality now is that she has to look for new buyers for her oil and this may not be an easy task as one might think in view of the fact that many countries are now discovering oil in commercial quantity. For instance, the United States of America has discovered and is developing more oil wells and fields in the states of North Dakota, Texas and others. This means that she may not resume the import of crude oil from Nigeria as one might think. This has serious negative economic implications for Nigerian oil market and by extension, her economy and could only get worsened when the US eventually attains/attained energy independence and stops/stopped buying oil from any OPEC state.
Here are my submissions as I end this article:
The Iran Nuclear agreement is a historic deal in the quest by the world to control proliferation of nuclear and other weapons of mass destruction in the international political system, depending on how one looks at it.
The deal would only become practicable when Iran and major world powers fulfill their parts of it. This would lead to easing of economic sanctions on Iran by the US and other major powers that are signatories to it. A direct implication of lifting of sanctions would be the bouncing back of Iran’s oil industry. This would mean the resumption of oil export by Iran to the rest of the world and could further crash global oil prices.
Countries with economies that are largely dependent on oil export would bear the economic brunt of this. Nigeria, a country that depends heavily on revenue from oil export cannot escape this and would definitely face more financial difficulties. To avoid this, now is the time for the Nigerian government to diversify the economy of the country and begin to shift attention from oil as its major foreign exchange earner in view of the dwindling fortune of the product.
There is also the need to fix power, energy sector, infrastructure, reduce cost of governance and curb corruption in the system. This is the only way to avoid the impending economic calamity that may befall the country as result possible oil glut that may accompany the Iran Nuclear deal and the politics of the US and her allies that have kept oil prices at very low level in the past one year.
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