Here at Money Morning we recently had the opportunity to sit down with Dr. Kent Moors, Money Map Press' Global Energy Strategist, for a quick chat about oil.
Kent had taken time out of his frequent world travels - scoping out the latest global energy profit developments - to stop by our HQ in Baltimore.
Here's what he told us about his "ground level" view of the real impact recent geopolitical events in Iran will have on the price of oil.
It's not what most experts think...
Money Morning: Good afternoon, Kent. Let's talk about the quickly changing situation in Iran and its potential influence on oil prices. You wrote recently about the concerns other analysts have expressed about the impact of an Iranian nuclear agreement on already low oil prices.
Kent: The current fear is the tentative agreement with Iran will flood the market with oil and further depress the price. Now, that's what pundits will tell you if they have 30 seconds on air to say something.
Any agreement is unlikely to endure. It became more unlikely after 47 senators essentially tried to sabotage it [in a letter on March 9 saying a future Republican administration would likely spike the deal]. That, largely, was all you needed to render it ineffective. I can tell you that, in that part of the world, that's really all you need. The United States now cannot be trusted to follow through, period.
Money Morning: The senators' letter alone had that impact?
Kent: Yes, and that's exactly why they did it. Iran doesn't know who to trust, so they don't trust anyone. But even with a tentative deal now, and assuming the next administration supports it, it will take a very long time before that oil gets to the market. You've got a situation where the Iranian infrastructure is disastrous and it's going to take a while to rebuild.
Some of that they can't do without significant outside support, and until you eliminate all the sanctions, the outside support's not going to be there. So you're not going to get the technology; you're not going to get what you need to move oil. They have to set up the trading structure; they have to set up the shipping arrangements, and so on.
Until a couple of years ago, for almost ten years, my wife Marina and I ran Thomson Reuters' Russian Petroleum Investor and Caspian Investor.
In the Caspian Investor we were dealing with oil and gas in the Caspian Basin (much of which is in westernmost Kazakhstan, but extends south into Iran) so I ended up writing all their Iranian material.
When we first started introducing Western sanctions, the most damaging were the ones that were applied to insurance companies and shipping outfits. Nobody wants to transport Iranian oil, and even if you do get a tanker that will carry it, nobody is going to insure it. People don't understand that part. They think "Okay, you couldn't sell oil... and now you can." But it's not that simple or quick.
To phase-in all of this process takes time. There's got to be trusted assurances and any agreement will require that certain benchmark indicators are met or sanctions won't be lifted. Or they'll be lifted in stages as you meet each one of these benchmarks. It's going to require very invasive verification inside Iran, which they've never been comfortable with historically.
Money Morning: What impact will Iran's existing oil exchange with China or India have on flattening Western prices?
Kent: The Chinese are very shrewd. They will buy Iranian oil at significant discounts. The only reason that Iran can do a lot of deals with the Chinese is because the Chinese have a balance of trade surplus with Iran.
So the Chinese are essentially purchasing a good deal of that oil in-kind. They don't even have to pay for it. Now, with most transactions - whether Iran likes it or not - they are denominated in dollars, so if you do not have access to hard currency accounts or hard currency bank transfers in the international banking community it's not going to happen. It's another barrier to doing deals.
So, as you can see, there are a lot of other things going on here. The Chinese were usually the largest buyer of Iranian oil. We had certain situations where the Indians, month by month, would be the largest buyers, but it was primarily the Chinese.
And, realistically, their economy collapsed years ago.
Money Morning: Under the weight of the sanctions?
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Kent: Foremost because it's a badly managed economy. It only keeps going by baling wire and Band-Aids. It just doesn't function. You've got a series of people who control the bazaars. They make a great deal of money regardless of who's in power.
You also have the ayatollahs on the one hand who don't really want to make political decisions, but on the other hand, they have as their primary responsibilities to maintain the Shiite way of life. So if there are any political decisions, you have a lot of internal conflict... it just doesn't work.
So it's already had that problem and the sanctions just compounded it. I did some back-of-the-envelope calculations recently. If you take the three most vulnerable countries in OPEC, in terms of the price of Brent crude, you have Venezuela, Iran, and Nigeria. I calculated what price Tehran needs to have any semblance of a balanced budget, and it's $145 a barrel - and no sanctions.
And that's not happening right away...
Editor's Note
So even if the verification details are sorted out quickly, the sanctions are lifted, and money floods into Iranian oil infrastructure to bring it back on line as soon as possible, there's little chance that enough oil will flow in the coming years to push prices down even more.
And even if the stars aligned and Iran could get its production numbers up quickly, it would be counterproductive because the potential decline in oil prices would put them even further under the country's $145 bogey.
About the Author
Dr. Kent Moors is an internationally recognized expert in oil and natural gas policy, risk assessment, and emerging market economic development. He serves as an advisor to many U.S. governors and foreign governments. Kent details his latest global travels in his free Oil & Energy Investor e-letter. He makes specific investment recommendations in his newsletter, the Energy Advantage. For more active investors, he issues shorter-term trades in his Energy Inner Circle.