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Thursday, February 11, 2010

Low oil prices: A tool to control Iran

By Steve Hargreaves, Staff writerFebruary 11, 2010: 4:02 AM ET Source


NEW YORK (CNNMoney.com) -- A desire to bring Iran to the bargaining table over its nuclear program could keep oil prices low worldwide for the next several months.

The country is the world's fourth-largest oil exporter, getting most of its revenue from oil sales, and needs prices near $100 a barrel to adequately sustain its government spending.

With oil prices near $70 a barrel and with its political instability, it may be more willing to enter discussions about its nuclear program which many say is designed to get nuclear weapons.

Some analysts believe oil prices will remain in the $70 range for perhaps the rest of 2010 partly due to Saudi Arabia, which has taken millions of barrels a day off world oil markets in response to falling demand.
Iraqi oil may rival Saudi Arabia

And with signs of a nascent global economic rebound emerging some think the Saudis will simply open the tap should crude prices begin to rise too much.

The Saudi's don't want high oil prices to hurt any global economic rebound. But they also don't want Iran, a rival in the region that has a nuclear program many say is designed to make weapons, to get the bomb.

"They are seeking to maintain financial pressure on Iran as the U.S. seeks to build support for additional sanctions over the nuclear issue," Greg Priddy, a global energy analyst at the Eurasia group, a political risk consultancy, said in a recent research note.

Lower oil prices could certainly hurt Iran.

Crude in the $70 range is thought to be enough to sustain Saudi Arabia's government spending, but not high enough for Iran.

Some say lower oil prices are already having an effect.

"These guys have to shoot their own kids," said Fariborc Ghadar, a senior advisor at the Center for Strategic and International Studies and a professor of global business strategy at Penn State about the recent political upheaval in the country. "Women in the cities are angry. The economy is in terrible shape. The place is a mess."

Of course it's not just lower oil prices that's driving the turmoil in Iran, but they are helping. Also helping are more targeted sanctions against investments in the country's oil infrastructure and decisions by U.S. allies to go after Iran's oil export market, said Ghadar.
For example, a new refinery in China is being built by the Chinese state oil company, Exxon Mobil, and Saudi Aramco. By enlisting the Saudi's cooperation on the project, it ensures the refinery will be supplied with Saudi oil, not Iranian. The Iranians then have to go out and find someone else to buy their oil.

"Third country markets may not be as economically attractive," said Ghadar. "It's causing a major burden on them."

Now, whether these problems would be enough to convince the Iranian regime to give up its nuclear program is another matter.

"That's a very complicated decision tree for the Iranian government," said Sharon Squassoni, a colleague of Ghadar's at CSIS and an experts on proliferation issues. "It might put on some pressure, but is it pressure enough? My guess is no."

Although Squassoni acknowledged what's been tried to date hasn't really worked either. "In seven years, we haven't figured out what the right amount of pressure is."
Saudi will power

The real question is, when oil prices do begin to go up, will the Saudi's long term interests and strategic concerns outweigh the immediate gains that could be made in their pocketbook?

One analyst who has connections inside OPEC thinks not.

"Saudi Arabia would like to make as much money as it can on oil, this is the most important thing to the Kingdom," said the analyst, who asked not to be identified. "Their love of money will supercede their interest in security."

Analysts that specialize in oil prices are generally split when it comes to the direction of crude prices in 2010.

But those that think they're going up, like Merrill Lynch's Francisco Blanch, also don't believe Saudi Arabia will open the taps anytime soon.

"We've already seen oil prices at $83," said Blanch, "and there wasn't much of a reaction from the Saudis"

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