Imagine that you control one of the biggest water reservoirs in the world. But other people limit your water consumption to just two glasses of water a day… meanwhile they’re drinking as much water from their own reservoirs as they please.
Then, one day – after decades of feeling terribly thirsty all the time – you’re allowed to drink as much as you want. So you begin to quench your desperate thirst for a few months… until the people who have been drinking as much as they wanted all along suddenly show up and tell you that, for the common good, everyone should drink less – including you.
What would you say? If you’re Iran – and instead of drinking water, we’re talking about producing oil – you’d say: No, thanks… I’m going to drink as much as I want, for as long as I want.
That’s kind of what Iran said – and that’s why the price of oil fell 4 percent today.
We recently wrote that oil prices would likely fall – after rising by 60 percent in recent months. Even though oil production was greater than oil consumption, expectations that oil production would soon fall had resulted in oil prices rising. (Markets usually move based on expectations of change – rather than current realities.)
Two of the biggest oil producers in the world, Russia and Saudi Arabia, were talking about freezing the amount of oil that they were producing. This, along with expected declines in oil production in the U.S., would result in supply and demand for oil coming closer to being in balance.
The big problem in the equation was Iran, which has been producing more oil. It’s trying to make up for lost time – for the oil it couldn’t export while it was under economic sanctions for much of the past three decades. As we’ve written before, Iran desperately needs oil to rebuild its infrastructure, and to buy the stuff that the rest of the world has been able to buy.
And Iran’s religious leaders want their take, too. (And the country’s president, which pushed for changes that led to the sanctions being lifted, has to show that it was worth the trouble.)
With these sanctions recently lifted, Iran now wants to export as much oil – and earn as much money – as it can. The last thing Iran wants (and which its president can politically afford to do) is to limit the amount of oil it can sell abroad.
At a big meeting of oil producers last weekend, Saudi Arabia changed its mind about freezing its oil production. According to the Financial Times, “Saudi Arabia had in effect torn up an earlier draft of the deal as it decided it could not be party to an agreement that would give Iran any leeway. Tehran had refused to join the freeze as it rebuilds its oil exports after years of sanctions.”
Iran and Saudi Arabia have long competed for influence in the Middle East. They’re usually at opposite ends of the region’s geopolitical struggles. The low oil price is hurting the Saudi Arabian economy. But it looks like it would sooner continue to hurt itself (through low oil prices), than watch Iran benefit from a higher oil price.
A lower oil price puts more money into the pockets of countries that are net importers of oil (that is, countries that don’t produce oil themselves,) which includes most of the countries of Asia. But that comes at a steep cost to big oil producers.
And there is an oil price that is “just right” for the global economy. It’s a level where consumers in much of Asia (and other major oil importers) might have a bit less extra money in their pockets than they do now (as they’d have to pay more to cool (or heat) their flats and to drive their three wheelers, or scooters, or Land Rovers.)
But it’s also a level where some of the biggest emerging markets – and oil producers – grow faster. That’s good for demand everywhere else in the world, and for the overall health of the global economy.
Markets usually think that a weak oil price reflects a weak global economy. And that might be true. So, if oil prices fall again, stock markets might slip back into the “everything is bad” mindset of January and February and start falling themselves.