The unintended unravelling of the OPEC pact agreement

Dr. Mohamed A. Ramady

Published: Updated:

The current OPEC plus agreement seems to be holding but the withdrawal of the US from the Iran nuclear deal has created some uncertainties going forward, with new red lines and slogans from all parties. Sometimes slogans can lead to far reaching consequences.

This was the case with Drill, Baby, Drill the slogan, which proved to be popular and gained further prominence after it was used by Republican Vice Presidential nominee Sarah Palin in her debate with Joe Biden in the 2008 US Presidential elections.

This was to spur US domestic oil production, particularly shale resources, and anything else that can “wean” the US from foreign oil imports. It has worked, with the US now a serious global oil producer, if not an exporter.

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However, sometimes slogans can become an embarrassment as Drill, Baby, Drill turned to Spill, Baby, Spill following the 2010 Deepwater Horizon oil spill at a British Petroleum offshore drilling rig in the Gulf of Mexico.

Catchy slogans can fire people’s imagination and sometimes leads to significant policy shifts, as was the case with the Republican Party’s support for US shale, coal and other conventional energy production. The results have seen US oil imports fall back, with China now overtaking the USA as the world’s largest oil importer, and the USA acting as the global swing oil producer, taking that mantra from OPEC.

If Trump reinstates US sanctions, the measures could be unilateral, unlike the global effort that brought Iran to the negotiating table last time

Dr. Mohamed Ramady

A divisive debate

This has also unleashed a divisive debate on the effect of unbridled fossil fuel production on a fragile world environment. Now we might have a catchier slogan of Bomb, Baby, Bomb with implications to the international oil markets.

US National Security Advisor John Bolton had cast doubt on the nuclear deal between Iran and major world powers, with potentially significant consequences for the oil market. Bolton, a veteran of George W. Bush’s administration known for his ardent support of the 2003 Iraq invasion, had described the accord with Iran as a “strategic debacle”.

His appointment follows the firing of Secretary of State Rex Tillerson, a defender of the nuclear deal, who was replaced by another foreign policy hawk, Central Intelligence Agency Director Mike Pompeo. Oil markets reacted bullishly, with international benchmark Brent crude rising about 8 percent to $71 a barrel.

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Both Bolton and Trump share a common cause on Iran and this has implications on oil policies and market stability. President Trump was required by law to certify every 90 days whether Iran is complying with the 2015 agreement, which eased US and international restrictions on the Islamic Republic provided it curbs nuclear research.

In October, the president said Iran had failed to live up to the spirit of the pact, but he stopped short of re-imposing US sanctions on its energy industry. He decided in January to hold back from imposing tough economic sanctions against Tehran, but only to give more time for Europe to fix the terrible flaws in the agreement.

Pandora’s Box

Before the latest May 12 deadline, Trump decided not to renew the US to the deal unleashing a Pandora’s Box of uncertainties. Since US and international sanctions were eased in January 2016, Iran has regained its position as one of the world’s biggest oil exporters, shipping more than 2 million barrels a day to customers in Asia, Europe and Turkey.

It did not, however, really reach a sustained 3 million barrels per day production despite being reluctantly exempted from the current OPEC plus agreement with non-OPEC producers.

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If the US were to force that amount of oil off the market again, it could turn a fast-shrinking surplus into a shortage and send prices higher and destabilise the careful balance of supply and demand that both Saudi Arabia and Russia are trying to achieve.

Trump’s opposition for the nuclear deal has already deterred investors from the country and of the Western energy majors, only France’s Total has returned, and its gas venture is proceeding slowly. If Trump reinstates US sanctions, the measures could be unilateral, unlike the global effort that brought Iran to the negotiating table last time.

International sanctions

During the most restrictive phase of US and international sanctions, from 2012 to 2015, buyers in Asia limited their purchases of Iranian oil, and the European Union imposed its own embargo on crude from Iran. However, countries that agreed then to buy less Iranian crude are signalling no willingness to cut back now.

The US could also penalize American subsidiaries of foreign companies that invest in Iran or purchase its oil. Buyers might try to avoid punishment by paying in non-dollar currencies, like China’s Yuan, or by working through companies that have no US subsidiaries.

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The impact on the market may not be quite so clear cut, because killing the Iranian deal could also prompt the Organization of Petroleum Exporting Countries, Russia and their allies to prematurely end their production cut at the end of 2018 or before, and boost supply due to high oil prices and a scramble for Iran’s market share as the group has voluntarily reduced production by more than 1.8 million barrels a day.

Any increased tension in the Gulf could lift Brent as high as $80 or more per barrel this year. Bolton’s appointment has lots of implications beyond just Iran.

It also makes Trump’s scheduled talks with North Korea’s Kim Jong-Un riskier, as the North Korean leader will might conclude that, notwithstanding all the sweet talk, any agreement is not going to be honoured and already the North Koreans are stating that the planned summit in Singapore in June might be cancelled.
Dr. Mohamed Ramady is an energy economist and geo political expert on the GCC and former Professor at King Fahd University of Petroleum and Minerals, Dhahran , Saudi Arabia and co-author of ‘OPEC in a Post shale world – where to next?’ His latest book is on ‘Saudi Aramco 2030: Post IPO challenges’.

Disclaimer: Views expressed by writers in this section are their own and do not reflect Al Arabiya English's point-of-view.