Iran, Oil and Mexico

The world is moving, and besides the many things happening within our borders that affect us, what occurs outside of our home also has an impact on us, although international events sometimes pass us by like the dawn. Last week, six world powers reached a definitive agreement with Iran regarding its nuclear program. This means that if everything goes according to plan, all of the economic sanctions that were imposed against Iran will be lifted at the beginning of next year, including all of the oil export restrictions. In simple terms, this tells us that if the agreement is implemented just as it is stipulated, there will be more oil on the market next year, which will obviously have implications for crude oil prices – a subject that is immensely relevant to our country.

Iran is one of the planet’s largest oil exporters. Before the sanctions imposed against it in 2012 took effect, the country used to export approximately 2.6 million barrels per day as the world’s third largest exporter of crude oil. Its exports then fell to approximately 1.4 million barrels per day due to the sanctions. It is thus natural to think that the lifting of the said sanctions will eventually result in the increase of crude oil supply by approximately 1.2 million barrels per day, which will obviously not contribute to its price recovery.

That said, it is worth pointing out that the lifting of sanctions will not take effect immediately. The agreement reached with Iran must be approved by both the U.S. Congress and the Iranian Parliament, and both approvals are expected to occur. In the U.S., Congress has 60 days to make a decision on the agreement. In the case that this decision is unfavorable, Obama could veto it and in this situation, it would require a two-thirds vote of both houses (the Senate and the House of Representatives) to scale back the agreements. As for Iran, Ayatollah Ali Khamenei, the nation’s supreme leader, has already endorsed the Vienna agreements. As such, we can expect the agreements to indeed take effect.

Even so, before lifting the sanctions against Iran, the country must verify with international inspectors that it is fully complying with its part of the deal. In this way, assuming all of the aforementioned occurs as has been stipulated, we can expect the restrictions on exporting oil to be lifted in Tehran at the start of 2016. Once that happens, Iran has said that it has the capacity to increase its production by between 500,000 and 600,000 barrels per day, which would increase its export capacity in just a few months. Regardless of whether this is accurate, Iran has an approximate stock of 35 million barrels, a part of which it would be able to dump on the market when its production reaches maximum capacity.

Additionally, as we know, in determining the price of raw materials such as oil, the physical supply and demand is only one part of the equation. Besides this, other markets are operating as hedges or futures, largely influenced by the prospective expectations of these prices. And as these expectations include the survival of the nuclear agreement in the face of internal obstacles both in the United States and in Tehran, as well as Iran’s full compliance with its commitments so that the sanctions against it are lifted as soon as possible, the prices of oil (and other raw materials like gold) have already been undercut.

We could include another geopolitical variable. One of Iran’s greatest regional rivals is Saudi Arabia, the largest oil exporter on the planet. A few months ago, Saudi Arabia began negotiations with Russia. The proposal involved the possibility of cutting back on oil production with the aim of promoting increased crude oil prices. In exchange, the Saudi people demanded that Russia relax its position of unconditional support for Assad in Syria, which is, of course, Iran’s greatest ally. These negotiations were unsuccessful. And not only that. Following the nuclear agreement between Iran and the six world powers, we can expect Saudi Arabia to continue favoring the maintenance of low oil prices for a good while, with the intention of limiting the profits that Tehran will make from the lifting of sanctions, among other things.

So what is being considered a triumph in the world of diplomacy through the negotiations and agreements that have been reached could have negative economic impacts for Mexico: (1) 2016 most likely will not be a year of oil price recovery – the federal budget should consider this in its forecasts; (2) the low oil prices will offer less appeal to the investors that our country is seeking to attract as part of the energy reform; and (3) as this is not the sole impacting factor, a lower influx of dollars into the country could also exert pressure on our exchange rate. It is better to go about preventing all of these factors. It is also better to get an understanding of how things which are occurring in other parts of the world may have direct repercussions on issues that are of immediate importance to us.