to a level not seen in decades, the International Energy Agency (IEA) reported last week.
The IEA said Iranian oil exports averaged 2.5 million barrels a day last year, but had plunged to 1.5 million in April and May, even though the EU and US sanctions had not yet taken effect.
The IEA is a Paris-based organization of oil importers from all around the world. It is often characterized as the yin to OPEC’s yang, with OPEC representing producers and the IEA representing consumers.
In its monthly market report, the IEA said Iran was still keeping total production high despite its inability to market oil. The IEA said production last year was 3.5 million barrels a day and dropped only to 3.3 million in April and May.
The IEA said, “In months ahead, Iran may need to shut in production volumes if export markets remain similarly constrained and storage fills up.”
The report said the world is better supplied with oil now than in recent years. But it cautioned against jumping to any conclusions that the sanctions on Iran would be a free ride for the world.
“Nobody knows exactly how oil supplies will develop this summer,” the report said. “Memories are indeed short; crude prices remain very high in historical terms and are acting as a drag on household and government budgets in OECD and emerging markets alike.” The OECD is the Organization for Economic Cooperation and Development, a grouping of 34 economically developed countries.
Meanwhile, the US Energy Information Administration (EIA) forecast that Iran’s production was about to drop precipitously—even without any sanctions—because of inadequate investment needed to develop new oilfields and extract harder-to-reach oil in aging fields.
The agency predicted that Iranian oil output would fall from 3.55 million barrels a day at the end of 2011 to 2.7 million at the end of 2012. That would be a drop of 850,000 barrels a day, a decline of almost one-quarter in one year.
The EIA said it expected Iranian production to drop another 200,000 a day in 2013.
The EIA is a US government statistical agency that is part of the US Energy Department.
Iranian Oil Minister Rostam Qasemi has denied any drop in either production or exports repeatedly over the last several months. Last Thursday, he was at it again. Attending the OPEC meeting in Vienna, he said, “Our exports remain as before.” He said the sanctions will “not have any negative impact on Iran.”
He spoke as if Iran held the upper hand because the world simply could not do without Iranian oil. “Do you think the world can ignore this energy?” he asked reporters. Asked by a reporter if Iran would consider selling oil at a discount because of sanctions, he said flatly, “Never.”
The theme that the world needs Iranian oil and that the Islamic Republic therefore holds the whip hand has been a popular one with officials, despite official rhetoric denouncing western countries for their “arrogance” in trying to use the whip hand on other countries.
Qasemi said, “Of course, we might face some problems. But for sure … the European citizens will pay more costs.”
Cliff Kupchan, an analyst with the Eurasia Group, a consulting firm, dismissed such talk. “The reality is that they’re on the verge of a choice between having a nuclear program or an economy. There’s nothing like no money in your wallet to straighten your senses.”
The key question is indeed just how much money Iran will have with lower exports. As the IEA noted, oil prices remain very high in historical terms. On page one, the chart on Iran’s oil revenues shows how much Iran has earned from oil annually since the revolution, after accounting for inflation. The bar for 2012 shows how much Iran will earn if its average exports for the year are 1.5 million barrels a day, the IEA figure for current exports, and the average price of a barrel is $100, slightly above the current market price. Iran would then have revenues of $55 billion for the year, the highest revenues for all but three years (2008, 2010 and 2011) of its history.
That suggests Iran is nowhere near pain, yet alone collapse, and that sanctions will have to slash Iranian revenues much, much more before the regime will hurt enough to compromise.