Monday, April 18, 2016

Is Iran free riding on OPEC?

If OPEC and seven other oil-producing nations agree to cut back output to raise price, this will benefit Iran, the big oil-producing nation who refuses to cut back output.  Such ``free riding'' can be modeled as a pricing dilemma.  In fact, Iran's free riding seems to have caused the entire agreement to collapse:

Mr. Novak explained that the 11 OPEC states and seven outsiders present during the meeting had spent two months drafting an agreement that would cap oil production at January levels in an effort to stabilize oil prices, and it was all undone by the fact that Saudi Arabia, Qatar, UAE, and "predominantly other Gulf States" insisted that Iran be included in the deal (Iran did not attend the talks).

4 comments:

  1. The Tyler Durden article is a great example of a strategic game being played by Iran and its Gulf coast rivals. Islamic religious differences drive the rift between Shia Iran and Sunni Saudi Arabia, Iran’s chief rival in the Gulf. Iran is making the decision to free ride and not commit to any production cuts, while the rest of OPEC is fighting to boost oil prices by limiting production. For Iran, any increase in oil prices unbounded by limits on its own production would be a significant gain. Iran has been shut out of the international oil market for years, until the recent agreement to curtail its nuclear programs. Now, they are desperate to regain those unrealized capital revenues.

    By staying on the sidelines while the other OPEC members to cut production will allow Iran to sell as much oil as it can produce, at inflated price levels. The other Gulf States don’t want to see Iran benefit from this arrangement, but the alternative to them is to continue with their production and see prices remain depressed. This is a game of chicken, but it is up to Saudi Arabia and their allies to decide if they want to swerve or to crash head on with Iran. For Iran, the decision has to be to continue producing as much oil as possible. It is not likely that Saudi Arabia would agree to any production levels that allow Iran to increase their net benefit, so Iran doesn’t even need to try to reach agreement. From Iran’s point of view, it should continue with business as usual and try to increase its capital inflows as much as possible.

    Stan.

    References:
    http://www.zerohedge.com/news/2016-04-18/russia-frustrated-after-doha-breakdown-how-can-iran-be-reason-failure-when-it-wasnt-
    http://www.bloomberg.com/gadfly/articles/2016-04-24/iran-might-spoil-saudi-arabia-oil-plan

    ReplyDelete
  2. The Tyler Durden article is a great example of a strategic game being played by Iran and its Gulf coast rivals. Islamic religious differences drive the rift between Shia Iran and Sunni Saudi Arabia, Iran’s chief rival in the Gulf. Iran is making the decision to free ride and not commit to any production cuts, while the rest of OPEC is fighting to boost oil prices by limiting production. For Iran, any increase in oil prices unbounded by limits on its own production would be a significant gain. Iran has been shut out of the international oil market for years, until the recent agreement to curtail its nuclear programs. Now, they are desperate to regain those unrealized capital revenues.

    By staying on the sidelines while the other OPEC members to cut production will allow Iran to sell as much oil as it can produce, at inflated price levels. The other Gulf States don’t want to see Iran benefit from this arrangement, but the alternative to them is to continue with their production and see prices remain depressed. This is a game of chicken, but it is up to Saudi Arabia and their allies to decide if they want to swerve or to crash head on with Iran. For Iran, the decision has to be to continue producing as much oil as possible. It is not likely that Saudi Arabia would agree to any production levels that allow Iran to increase their net benefit, so Iran doesn’t even need to try to reach agreement. From Iran’s point of view, it should continue with business as usual and try to increase its capital inflows as much as possible.

    Stan.

    References:
    http://www.zerohedge.com/news/2016-04-18/russia-frustrated-after-doha-breakdown-how-can-iran-be-reason-failure-when-it-wasnt-
    http://www.bloomberg.com/gadfly/articles/2016-04-24/iran-might-spoil-saudi-arabia-oil-plan

    ReplyDelete
  3. I agree with Stanley’s observations. The economic and geopolitical interests of these countries are definitely in friction – which many consumers might see as a good thing [debatably, and at least in the short-term].

    OPEC’s Arab members – who, because of the historically low price of oil - have recently had to borrow. Russia, which is similarly over reliant on oil as a means of revenue, would seem to have similar interests in pushing the price of oil up.

    Even with its weaker position because of production in the U.S. and elsewhere, OPEC still has significant influence. If Russia and other OPEC members played the cartel game with greater focus, they would probably archive some headway.

    Perhaps Russia was hoping to be more of a political free rider – getting everything it wanted without having to expend the political capital it would need to with its pseudo client state, Iran. From Vladimir Putin’s point of view, what could be better than at least a partial recovery of oil prices and an Iran flush with cash and ready to buy even more Russian-made weaponry?

    References:
    http://www.zerohedge.com/news/2016-04-18/russia-frustrated-after-doha-breakdown-how-can-iran-be-reason-failure-when-it-wasnt-

    http://www.cnbc.com/2016/04/19/saudi-arabia-takes-out-10bn-in-bank-loans.html

    http://www.timesofisrael.com/iran-defense-chief-said-eyeing-arms-deal-with-moscow/

    ReplyDelete
  4. It’s hard to say where Oil prices are going to go, but as per now, I believe we should just keep watch on things and hope for the best, I do that only and thanks to broker like OctaFX, It’s to do with their swap free account where I can do long term trading easily and never have to worry about anything at all. I am able to work very nicely and that’s something how I am able to achieve great profits and also able to do it regularly too.

    ReplyDelete