Iran deal adds to pain for US oil producers

Experts disagree about how much incremental damage US drillers will suffer.

 

Republicans have attacked President Obama’s deal with Iran from many angles in recent months, but critics have come up with a new one: It will hurt the West’s oil producers. Lifting sanctions on Iran provides opportunities for Iran’s oil industry to expand “at the expense of America’s economy at the near term,” Alaska Sen. Lisa Murkowski, the Republican chairman of the Senate Energy Committee, said in a floor speech last week.

Sen. Lisa Murkowski speaking on Senate Floor in opposition to Iran deal.

An influx of Iranian oil will push low crude prices even lower than they already are, she argues, and US producers will be unable to compete freely because of a US ban on crude exports, which Murkowski opposes but has failed to overturn.

“Increased output by Iran will lower global oil prices, which would be a good thing for consumers everywhere were it not for the fact that we ban exports of our own oil. In effect, we sanction ourselves,” Murkowski added. “Our diplomacy benefits Iranian producers, while our antiquated domestic policy harms American producers.”

The prospect of an emboldened Iranian oil industry increased jitters among Western producers who already have been hammered by many months of declining and low prices caused by a glut of oil. But some experts say that the impact of Iranian oil on world prices likely will be mild--at least in the short run--because Iran is not in the position to flood the market with oil.

Still the Iran deal adds to other factors that have caused volatility and prevented a rebound in oil prices, which fell from above $100 last summer and have stayed around $50 in recent months. Although Iran has the fourth largest crude reserves in the world, its exports are about half what they were in 2011 before the US and other countries imposed sanctions because of Iran’s illegal nuclear activity. The current deal would lift those sanctions.

Iran's South Azadegan field. File photo.

It will take time, however, for Iran to ramp up production, so the downward pressure on world oil prices from Iranian oil is unlikely to be great, at least through 2017, according to Wood Mackenzie, a leading industry analyst group. To capitalize on its potential, Iran must first develop policies that would attract long-term investment. If it succeeds, the group says Iran could become a key source of global oil supply after 2020. Other analysts agree that a flood of Iranian oil is not imminent. However, Charles Mason, a University of Wyoming professor of petroleum and natural gas economics, said the threat to Western producers from Iranian oil is real, and today’s prices already are starting to reflect that. “Downward pressure on prices in the last month or so is probably tied to expectation about the Iranian deal,” he says.

He agrees with Murkowski that the US industry is suffering a “double whammy” from the Iran deal and the export ban.  The ban limits Western producers' access to foreign markets that value light crude, which is cheaper to refine.

As a result, Western producers have had to sell their oil at a discount, because the light crude from North Dakota’s Bakken, and from fields in Wyoming, Colorado and New Mexico, is not what most US refineries want. Not anticipating the surge in US production of light crude, many US refineries invested in expensive equipment to refine heavy crudes from Venezuela and Canada, which they can buy at a discount.

That makes Western producers, whose drilling costs are high, vulnerable to relatively small reductions in prices. If Iranian oil pushes global prices below $40, Mason says, prices for Bakken and West Texas crude will likely reach an unsustainable $30 to $35. “Some of them are going to shut in their production,” he says.

Mason predicts that after steep increases in recent years, oil production will start to decline in places like the Bakken and New Mexico’s Permian Basin.

“This will put a little bit of a sting in things,” Mason said. “But really it’s small potatoes in comparison with having oil prices drop form $100 to $50.”

While some domestic producers will suffer, if the US Energy Information Agency’s projections are correct, drivers and many businesses will benefit from low prices on gasoline and other petroleum products for the foreseeable future.

Elizabeth Shogren is HCN's DC Correspondent.