Could releasing pent up Iranian production capacity cause oil prices to plunge?


If the unleashing of Iranian oil production leads to a substantial drop in crude prices, producers in other countries may need to upgrade their equipment to maintain a competitive advantage.

In a recent post, this blog looked at some of the current trends that are putting downward pressure on the market value of oil. Although still high by historical standards, the price of crude has fallen recently as inventories have grown on the back of increased production.

However, there is a risk that the price of oil could drop much further in the near future. Industry analyst Robert Rapier looked at this topic in a recent article published by Energy Trends Insider.

While Rapier said that he believes crude oil will inevitably become more expensive over time as a result of growth in global demand and relatively flat production levels, he explained how one scenario has the potential to "drive prices down in a hurry." Specifically, he was talking about Iran.

The country has been subjected to harsh economic sanctions in recent years as a result of growing tension over its nuclear energy program, which the United States and its allies say is aimed at producing weapons of mass destruction. Increasingly isolated from global markets, Iran's output has plummeted in recent years, with oil production equipment left idle as a result of producers being cut off from financing.

After a relatively moderate candidate named Hassan Rowhani was elected president of Iran earlier this month, many began to speculate about the potential for an easing of tensions. If the current sanctions are relaxed, Iran's pent up production capacity could be unleashed very suddenly, leading to a supply surplus and a sharp drop in prices.

Within the Organization of Petroleum Exporting Countries (OPEC)—an influential cartel that accounts for more than 30 percent of global oil production—Iran has long been considered a "price hawk" for its resistance to raising production quotas. However, with the country facing a compelling need for hard currency as a result of the crunch brought on by international sanctions, it may change its tune if given the opportunity to put oil on the market again.

In the case that Iran begins pushing down prices by selling large volumes of crude, the importance of efficiency would be paramount for oil producers looking to remain competitive. Implementing new equipment such as hydraulic jet pumps can help producers extract oil in the most cost-effective manner and maintain healthy profit margins during challenging times.