The rapid increase in Iran's oil exports have caught global oil markets by surprise. The nation's pledge to return to pre-sanctions levels of production by June were seen as a pipe dream earlier this year, but have apparently become reality.
Locked in an ideological and economic battle with Saudi Arabia, Iran sees rapidly increasing their oil exports as vital to its regional interests. That would likely entail enticing foreign investment, but resistance from the US and Iran's own hardliners have put such hopes on hold.
A Petro Miracle or Sleight of Hand?
The International Energy Agency reported that Iran's oil production hit 3.6 million barrels per day in April, the highest level since November 2011, when sanctions took effect. Crude exports were reported at 2.3 million barrels per day, 15% more than the IEA forecast.
Some analysts point out that this may just be a burst of exports may be a side effect of Iran using most of its state-owned oil tankers as floating storage platforms. This meant that some tankers were ready to go soon after sanctions were lifted. All they needed was a customer to deliver to.
Of Iran's 40 Very Large Crude Carriers (VLCC,) 12 were recently reported as being in transit to Asia, while 28 were still being used as storage. Sixteen chartered tankers were reported as hauling Iranian oil to Europe.
The number of foreign shipping companies willing to haul Iranian oil has suddenly grown, as arrangements for insurance that doesn't run afoul of continuing sanctions by US have borne fruit. Reuters reports that at least 26 foreign oil tankers had loaded or were about to load Iranian oil. Some of these tankers belong to the Chinese government, who have no fear regarding US sanctions.
Uncle Sam's Finger In The Pie
The US has had sanctions of one sort or other in place against Iran since the 1979 hostage crisis. Even after the relaxation this year of UN sanctions against Iran over its nuclear program, pre-existing US sanctions remain in place. These sanctions have all but choked off Iran's international trade.
Not only are US companies and banks still forbidden to do business with Iran, but any foreign company doing business with Iran cannot use the US banking system. In fact, any foreign bank with branches in the US face the possibility of large fines, or worse, for handling transactions between foreign companies and Iran.
This has caused some leaders in Iran to accuse the US of double-talk during negotiations over the nuclear sanctions. Meanwhile, Iran conducts as much business as possible in euros.
Head To Head With The Saudis
With the lifting of UN sanctions, Iran's religious and military rivalry with Saudi Arabia has entered the economic sphere. This has led to oil price wars in Europe and Asia, with Iran rapidly regaining market share. In retaliation, the Saudis are doing anything they can to crimp Iran's oil exports. Among other measures, the Saudis are aiming to sign joint ventures and other contracts from Western companies, to keep them from revitalizing Iran's oil fields.
Iran's backing of terror groups such as Hezbollah and Hamas keep it under US sanctions, giving the Saudis the advantage of luring American investment (and the tacit support of Washington in any regional conflicts). European companies wary of US retaliation for trading with Iran may also rather do business with the Saudis instead.
Is Foreign Investment A Trap?
Iran's reprehensible treatment at the hands of British and US oil companies, including the assassination of a popular prime minister, is ingrained on the nation's psyche. In fact, the constitution adopted after the 1979 revolution specifically forbids foreign ownership of Iranian oil fields.
Conservatives, religious leaders, and nationalists vehemently oppose any sort of deal with Western oil companies, despite Iran's desperate need to repair and modernize its petroleum industry. The Rouhani administration has tried to craft an economic policy that is both acceptable to the ayatollahs and nationalists, and palatable to Western investors.
Stratfor compares the differences in Iran's proposed joint ventures from an ordinary investment: Western oil companies will be invited to help explore for new oil fields and run pumping operations, but ownership of the oil and control of the joint operation will reside with the Iranian government.
There is only an outline of how these agreements would work, as political factions wrestle to be the ones to bathe in the fountains of cash that will ensue. The Revolutionary Guards in particular will be out to keep the lucrative deals it gained under Ahmadinejad. They will demand a piece of the pie in other sectors for a reduced payout from Iran's oil exports.
Opposition to these deals not only comes from those profiting from the current graft setup, but the ordinary people who are tired of never seeing any benefits from the nation's oil wealth.
Iran is finding that getting the oil out of the ground is the easy part.
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