Trump wants to force all countries to stop buying Iranian oil by threatening them with sanctions. On the other side, Iran is threatening to block oil exports from the Gulf by blocking the Strait of Hormuz. The effective date of the US pull-out is November 5.
Iran is viewed by many as the funder of terrorism and the US aims to destabilise the country to bring about a change in regime. But what is the real motive behind Washington’s aggression? Both countries have one thing in common - they are major producers and exporters of crude oil.
The US’s share of world crude oil production almost doubled since 2011 from 7percent to 13percent in the first quarter of this year and grew by 15percent a year from 2012 to 2015.
Production contracted from 2015 to 2016 after the crash in the oil market, but gained traction again in the first quarter of 2017 and is currently growing at a rate of nearly 15percent year-on-year.
The compounded growth in US crude oil production was 10percent a year since 2011, while oil production in the rest of the world increased by a paltry 1.4percent a year.
The game-changer was the rise of fracking, which spread to shale oil fields where shale wells can be drilled and start pumping oil relatively quickly. In 2016 fracking wells churned out 49percent of the crude oil production equivalent of the US with a breakeven equivalent of about $40 (R535) a barrel. Furthermore, the US controls a large part of the export of crude oil by other countries. US net imports and exports account for 12percent of world crude oil production outside the US.
In total, the US controls in the region of 25percent of the global oil market. In addition, it seems that the US is firmly in control of Iraq’s oil production.
US crude oil imports from Iraq makes up nearly 15percent of Iraq’s total production and constitutes more than 10percent of total US imports oil crude oil compared to 2percent three years ago, and is rising.
The increase in US imports from Iraq came at the expense of imports from Saudi Arabia and other Opec countries.
US imports from Saudi Arabia and other Opec countries fell to 10percent and 15percent, respectively.
It is, therefore, not surprising that Washington wants to effectively disband Opec as Iraq may pull out of Opec. It is no wonder that rumours are doing the rounds that the “No Oil Producing and Exporting Cartels Act” or Nopec Bill will be passed, which according to Bloomberg could allow the US government to sue members of the Opec cartel for manipulating energy prices.
Washington’s control over the global oil market became even clearer with Opec and Russia agreeing to increase oil production by 1million barrels as Trump felt that the high oil price at the time was artificial.
He has probably done so to make up for the probable reduction of Iranian production and exports as a result of the possible sanctions against Iran which will become effective early in November this year.
Sanctions saw Iranian crude oil production contracting by 25percent, or 1million barrels a day, from 2012 to 2015, but recovered by 1.5million barrels since sanctions were lifted.
Iran’s stake in the total world production of crude oil is just above 5percent.
With the global economy entering the late cycle stage, the prospect of slower growth in the global demand for petroleum products must be a big headache for Washington.
Virtually all the growth in global oil production over the past seven years was as a result of US production growth. Any slowdown in demand growth globally will have a direct impact on the US oil industry.
What probably worries Trump the most is that a global glut in oil may develop again with devastating results on the US and global economy as well as financial markets. It is especially evident that the rate of production growth lags the oil price by six months - any downturn in the oil price will be exaggerated by continued high output.
One option is to take out another producer and create instability in the Gulf to keep the US crude oil production on a sustainable growth path.
The dice falls on Iran. It is in Trump’s interest to wield the sword in the case of Iran as the two countries share the same export markets.
US exports to China amounts to 265000 barrels a day, while Iranian exports to China is more than 600000 barrels a day.
India is the second biggest market for Iran as it imports about 400000 barrels a day, while India’s imports from the US is insignificant. India has already indicated that it’s not prepared to cut its imports of crude oil from Iran and it’s pretty obvious that China will not give in to Trump’s demands given the strained relationships.
Virtually all economic regions and countries that were signatures of the international deal in regard to Iran’s nuclear programme have rejected the move by Trump.
Trump’s punitive actions against virtually all countries, including the US’s friends and (“former”) allies, have already started to impact heavily on parts of the US economy.
China’s counter move to hike tariffs on imports of soybeans has hit a sweet spot in the sense that soybean farmers - major supporters of Trump - have to endure a slump of more than 15percent in soybean prices.
Trump’s tirade in regard to Iran should rather be seen as an effort to bring Iran back to the negotiation table in regard to Iran’s nuclear programme, unless he wants to destabilise the Gulf region and by doing so forcing countries to absorb excess US oil production.
Ryk de Klerk is an independent analyst: contact [email protected]