Iran: Pass on OPEC-Wide Production Freeze

The OPEC production freeze that hit headlines at the end of September was described by Russian President Vladimir Putin as “the right decision for world energy”. OPEC members as well as Russia have long faced the tradeoff between destabilizing oil prices and ensuring their market share, and this agreement was meant to indicate that, at least symbolically, they were prepared to choose the former (many analysts consider the agreed output reduction to be negligible in real terms, but more indicative of a trend toward a price increase) (2). Iran, however, currently stands to be exempt from this trade-off; negotiators reached consensus at the meeting that, given its political and economic context, Iran ought to be able to continue producing oil as its capacity picks up post-sanctions.
 
This is direly needed; the last five years have been rocky for the Iranian economy to say the least. This can be mostly chalked up to the sanctions regime; billions of dollars in foreign accounts are frozen. American-imposed restrictions limit the ability of Iranian businesspeople to transact in USD. A slate of trade sanctions were long in place, some of which still are, calculated to pressure the Islamic Republic in several arenas, most notably its nuclear program and proxy wars in Syria and Yemen (1)(3). This led to two consecutive years of very negative growth in 2012 and 2013. As negotiations progressed and some sanctions were lifted, growth picked up and the economy grew 4.34% in 2014, alongside reductions in inflation (1). 
 
The 2014 growth explosion is attributable to large-scale re-activation of previously dormant industries (such as reopening of oil fields) as post-sanctions investment poured into the country. Still, Tehran claims that there is still 400,000 barrels per day worth of capacity that remains untapped since the nuclear deal sanctions regime (3). Meanwhile, large OPEC producers, even under the freeze, will be operating at or near capacity. Thus the Iran exemption can be justified as a simple leveling of the playing field. 
 
Like in Saudi Arabia and many other OPEC producers, Iran’s oil reserves are mostly nationalized and therefore the country’s fiscal position is heavily dependent upon the oil economy, with oil making up 45% of GDP and 90% of exports (3). The price freefall caused Iran’s budget deficit to more than double from 2014 to 2015, especially because production was still catching up to capacity (i.e. market share was disproportionately low) all while prices drove down the revenues that could be gained. A World Bank model made before the recent OPEC deal forecasted this deficit to ease in the coming years to 1-2% assuming no production cut (4). These numbers could get even better if, simultaneously, other oil producers were leaving more oil in the ground. Thus Iran stands to gain hugely from this exemption.
 
OPEC leaders clearly agree that it is in their long-run interest to collaboratively manage oil production in order to put a floor under oil prices and ultimately ease the supply glut.  In doing so, they have elected not to throw Iran under the bus. It remains to be seen whether this support continues as further meetings are held.

(1) By the Numbers | The Iran Primer. "Iran's Economy, By the Numbers." United States Institute of Peace. United States Institute of Peace, n.d. Web. 16 Oct. 2016.
 
(2) Arkhipov, Ilya. "Putin Pushes for Oil Freeze Deal With OPEC, Exemption for Iran." Bloomberg.com.
Bloomberg, 2 Sept. 2016. Web. 16 Oct. 2016.
 
(3) Gamal, Rania El. "OPEC Agrees Modest Oil Output Curbs in First Deal since 2008." Reuters. Thomson Reuters, 29 Sept. 2016. Web. 16 Oct. 2016.
 
(4) "Iran Overview." The World Bank. N.p., 1 Oct. 2016. Web. 16 Oct. 2016.

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Image: © Alireza Teimoury | Dreamstime.com - Oil Industry worker