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Iran's Oil Strategy: Interview in Iranian Magazine "Ayandenegar"

by ChrisCook Mon Nov 2nd, 2015 at 06:05:23 AM EST

From time to time the thoughts of Chairman Cook are published in all sorts of Iranian publications,and this interview on Page 57 of the Iranian energy/finance magazine "Ayandenegar" is my latest.

Since my Farsi is poor, I'm not sure how much of the interview was printed, and to what extent it was edited but the original English text follows.

With your permission I would like firstly to outline my view of the dynamics of modern commodity markets. The market in fossil fuels has exhibited the same cyclical 'Boom and Bust' behaviour historically as any other commodity market. In my analysis there are essentially two price levels or boundaries in commodity markets, and where the commodity is limited in supply both of these boundary levels trend upwards over time.

Firstly, there is a lower boundary level or 'buyer's market' at which supply exceeds demand. The cheapness of the commodity attracts new buyers while producers with high costs shut down production when losses become too great to bear. Meanwhile banks and investors are reluctant to finance new development.

Over time, demand for consumption begins to exceed supply - a 'seller's market' - until the market price eventually reaches the upper boundary level. At this point the combination of new higher cost supply, and demand destruction through substitution or efficiency measures leads to an excess of supply over demand and the price falls to the lower boundary again.

In the case of the oil market this cycle has been amplified by the presence in the market of massive financial buying of commodities supported by debt, derivatives such as futures contracts, and more recently, by passive investment by risk averse investors fearful of price inflation, and investing in commodities in an attempt to preserve the $ value of their capital.

So much for the history, but I must add at this point that I believe that this historic paradigm of boom and bust is now over for good. Due to exclusion by sanctions from both physical and financial markets Iran has a historic opportunity to refuse to rejoin the failed Western oil market paradigm and to lead the transition to a new paradigm.

So with that introduction I will now turn to your questions.

(Ayandenegar Interviewer - Nada Saboori) How does the falling of oil price change the dominant strategies of energy world?

Following the historic cycle outlined above, the falling price will cause consumption of oil products to rise, and oil production to fall, and in due course the oil price will rise again as low cost fields decline in production and demand rises.

Does the behaviour of oil prices (falling continuously) cause energy and fossil fuels get much share in the world? Does the share of fossil fuels grow and become more?

Again following the historic cycle we would see the share of fossil fuels rise as prices fall.

The future of this trend is in favour of what groups or countries? Is it beneficial to consumers or producers?

Naturally, cheaper carbon fuel costs benefit consumer nations, while producer nations whose budgets have been inflated during the 'happy times' of high oil prices will see an economic downturn, and possibly even a recession or depression, depending upon what debt obligations they have assumed. This in turn will affect those countries which are accustomed to sell arms, technology, goods and services to oil producers which were paid for by Dollar and Euro borrowing.

What is the effect of this period of time (falling prices) on the countries of Middle East?

A prolonged period of low prices will have seriously destabilising effects on those Middle East countries which have wasted oil and gas windfall profits on profligate expenditure and subsidised lifestyles. Paradoxically, Iran has been protected from this problem, having been forced by physical sanctions to build domestic productive capacity and thereby achieve independence and resilience. Meanwhile, and even more ironically, financial capital has been obliged to remain in Iran because financial sanctions prevented capital flight to hard currency accounts in Switzerland and the West: this is particularly the case for capital flight caused by corruption and poorly executed privatisation similar to that which afflicted post-Soviet Russia.

Is the period of time a historic point? Do the people in future count it as a historic point in history of oil?

As the former Saudi oil minister Zaki Yamani put it, the Stone Age did not end because of a shortage of stones, and the Oil Age will not end because of a shortage of oil.

I believe that there is now a long term 'upper boundary' price for oil. The first limiting factor is high cost US shale oil which may be deployed at short notice and which essentially constitutes a second tier US Strategic Petroleum Reserve. This gives the US energy security- at a price - and currently this upper boundary price is around $60/barrel, although oil prices could spike temporarily through that level.

The second limiting factor for the oil price is the rapidly falling cost of renewable energy, particularly solar and wind energy - which displaces fossil fuels - combined with the rapid spread of 'smart' technologies which act to improve energy efficiency. As has been said, the cheapest carbon fuel of all is carbon fuel saved, and the more expensive carbon fuel becomes in $ and € terms, the more $ and € profit is to be made from saving it. So I believe it is indeed the case that the oil market has reached a historic inflection point of Peak Demand.

This period (falling of prices) is along with Iran coming back to the oil market as Iran tries to get back to its previous level of production; How do you evaluate this? How does Iran affect on the market? And how is it influenced by this situation?

It is one thing for Iran to attain a high level of oil production capacity, but quite another to actually bring this capacity to market. In my judgement, it would be most unwise for Iran to engage in a race to the bottom by producing oil at full capacity as soon as possible. An influx of oil into an already over-supplied market with relatively little spare storage capacity could see oil collapse to levels not seen for decades. Ministers will note that two million barrels per day exported at $40/barrel will raise the same income as the export of four million barrels per day at $20/barrel.

My advice to Iran is not to dump oil on the open market but rather to seek out and enter into long term oil supply deals on the basis of swaps, such as oil for petroleum products. In this way Iran could attain security of oil demand while consumer nations such as Scotland, Greece or South Africa (to name three candidates) would attain security of supply. Iran could agree to take either physical products or financial rights to products - prepay product credits - which may in turn be exchanged for goods and services.

China's economy is slowing while it is the biggest energy consumer in the world. How does this affect on the producer countries and the rest of the world?

When the history of markets is written I believe two key turning points will be identified. Firstly there was the moment - which I date to the collapse of Lehman Brothers in October 2008 - at which the global burden of dollar denominated debt exceeded the capacity of the developed world to pay it - I think of this as the moment of Peak Debt. This essentially marked the beginning of the end of the deficit-based dollar economy based upon bank-manufactured credit.

I see the current economic turning point in China as a moment of Peak Demand at which the 'Irresistible Force' of increasing consumption of goods and services has run up against the 'Immovable Object' of the dollar cost of the energy and resources necessary to produce it.

In the absence of a transition to a new market architecture and instruments - which are not only available, but have always been available and have simply been forgotten - we will see the emerging and highly indebted (particularly with private bank debt) resource rich nations such as Brazil, Russia and Australia collapse financially. This in turn will lead the US, EU and other nations which supplied and financed these nations to recession at best and depression at worst.

But this need not be so. I have long advocated a new settlement directly between energy producers and consumers such as the multilateral institutions referred to by President Rouhani at Davos in 2014.

As I stated above, the unprecedented and unique position of re-entry into a terminally broken market enables Iran to propose and lead just such a global initiative - an energy Bretton Woods.

Talk about unintended consequences.  Iran is isolated as punishment, of necessity plows its profits into internal investment, and is now in a better position than the rest of the region.  And the bigger picture, what Iran should do now, is definitely a tangle.  Long term arrangements would be best, as you said, but how many are available?  The private credit card is maxed, and the neolibs won't let the public card out of the ice box.  And China may have the ultimate, incurable, economic disease.  Yes, definitely a tangle.
by rifek on Mon Nov 9th, 2015 at 05:35:29 PM EST
Iran is second only to Egypt in population for the region, 79 million to 88 million, almost exactly the same size as Turkey,and more than twice the size of Iraq, Syria or Saudi Arabia, with Saudi numbers probably including all the 'guest workers' and ex-pats. It is, overall, likely better educated than Iraq, Syria or Egypt. So they should just keep on keeping on and negotiate longer term deals with such partners as they can find. They could also profitably invest in their refinery and plastics industries, any higher value products with crude oil as the input. That could provide Iran synergy in its relationship with China. Central Asia is the nearest, biggest opportunity for future development and investment. Iran could supply the educated workforce needed in the Islamic parts of Central Asia for many infrastructure projects as well.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Mon Nov 9th, 2015 at 06:15:42 PM EST
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This says a lot about international trade.
by Upstate NY on Thu Nov 12th, 2015 at 12:17:39 PM EST
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