Iran or No Iran, There Will be Oil

Why an attack on Iran would not disrupt global oil supplies.

By Peter C. Glover and Michael J. Economides

Iran is the new Gordian knot and, similar to Alexander the Great’s solution, whatever cannot be untied can be cut. Although a sudden and catastrophic event, buoyed by headlines, may push the price of oil to over $150 a barrel, measures already taken will settle the situation rather quickly.

The hand-wringing public angst of politicians and pundits alike contemplating an Israeli military action against Iran’s nuclear facilities is overblown, and for two reasons. First, Iran’s neighbors in the Middle East are fast-revealing where their true loyalties lie – and it isn’t with Tehran. And second, Iran’s oil power is already declining.

The Saudi Commitment
Speaking at the biennial International Energy Forum conference in Kuwait in mid-March, Saudi Oil Minister Ali Al Naimi offered this commitment regarding Iranian oil exports: “Saudi Arabia and others remain poised to make good the shortfall, perceived or real, in crude oil supply.” Right there, in that single sentence, is the bottom line which should allow Western politicians to rest easy on two counts: First, over the potential loss of Iranian oil in the wake of an Israeli strike; and second, over the oft-repeated myth that a “conflagration across the Middle East” would ensue.

The Saudis were offering assurances in response to a direct request from the U.S. But the willingness of the Saudis and others to make such a commitment demonstrates plainly enough that Shia Iran does not actually have any real Sunni Arab friends, not when Iran is on an ideologically-driven, potentially nuclear-powered, mission.

OPEC may currently be chaired by a former Iranian Revolutionary Guard, but that will not mean its constituent members will allow themselves to be cajoled into another 1973-style oil embargo should Iran be attacked. OPEC members understand well enough that such an action would more than likely trigger a political reappraisal over energy in the West, one that would see Western public opinion swing behind fast-tracking domestic oil and gas shale projects that would be in anything but the best interests of OPEC members. And the threat to OPEC isn’t just coming from shale.

The New Energy Math
According to the World Energy Council, global proven reserves of natural gas liquids and crude oil stood at 1.2 trillion barrels in 2010, around four decades’ worth at current usage rates. New technology, new discoveries and high oil prices are reviving previously abandoned prospects. With oil shale contributing a further 4.8 trillion barrels of oil-in-place – around a century and half of supply at current usage – and oil sands around six trillion barrels more of oil-in-place, hardly anyone is in the business of “peak oil” scare-mongering anymore.

While it will likely take up to ten years or so for some recent large discoveries, such as Repsol’s massive 22.8 billion barrels of oil and gas in Argentina’s Vaca Muerta shale prospect (doubling current reserves), to be fully developed, other discoveries are already in the pipeline. U.S. oil shale prospects are coming online fast. And if President Obama loses the White House in November, U.S. shale and offshore development is likely to grow exponentially.

Moreover, President Obama’s bizarre Keystone pipeline decision has had the effect of “incentivizing” Canada to actively pursue sales in overseas markets that will also potentially offset Iranian supplies, especially to Europe. Major offshore discoveries from Norway to Israel and Angola to Brazil, not to mention vast shale prospects in China and India among others, all suggest now would not be a good time for Middle East producers to alienate global customers.

Even so, for a country that boasts the world’s second largest oil reserves, Iran’s oil market clout is already draining away. Possessing the world’s second largest natural gas reserves, Iran is, incredibly, a net importer of natural gas. This fact alone astonishes most students of the area and puts the government of Iran into a deeper loony bin than anybody could have envisioned.

According to the International Energy Agency (IEA), Iran’s share of global oil production is set to fall from 4.9 percent in 2010 to 4.5 percent in 2015. Meanwhile, even with enormous shale oil development in process around the world, oil exploration budgets everywhere are ramping up for another bumper year. Industry consultant Wood Mackenzie reports that spending on oil and gas exploration hit a record $72 billion in 2011, and it looks as if that figure will be exceeded in 2012. Shell is increasing its spending on exploration by 35 percent this year. BP is doubling its exploration drilling capacity.

Saudi Arabia produced around 10 million barrels of oil per day in February. It is likely to match that in March. At March’s IEA conference in Kuwait, one Saudi insider told the Oman Times there were no plans to increase supply in the months ahead. But that belies the fact that Saudi Arabia, Kuwait and the United Arab Emirates have the joint capacity to ramp up production to help match an immediate Iranian shortfall.

In the U.S., President Obama’s anti-fossil fuel policies and rhetoric persist. But energy is fast rising to the top of the political agenda. While Obama maintains that domestic oil drilling won’t “fix gas prices” (meaning petroleum prices at the pump), he is up against a powerful argument from his political opponents: The US is potentially awash in oil. It is breathtaking to realize that Wyoming and neighboring states alone are estimated to hold more than 800 billion barrels of oil, mostly in shale formations. All of which goes a long way to explaining why the European Union appears bullishly confident of finding alternative oil supplies when it stops buying Iranian oil on July 1.

The Nuclear Gambit
The Mullahcracy in Tehran understands well enough that nuclear, not oil, is the way to go to achieve what it most craves – a seat at the superpower table. Whether sanctions could have worked is a moot point. In truth, they never really had a chance. Iran’s “rush to nuclear” dictated timing. And as a host of recent reports, including one from the International Atomic Energy Agency, has made clear, time is running out if the world’s leading terrorist-sponsoring state is to be stopped.

But if, as looks increasingly likely, conflict over Iran’s nuclear ambitions is approaching, two things are clear: Shia Iran’s Sunni “friends” will not stand with them and, Iran or no Iran, there will be oil. – MarEx    

Peter Glover is the European Editor and Michael Economides the Editor-in-Chief of the Energy Tribune.