Oil demands balancing act

By Bart Chilton

Tribune News Service

There’s now a general framework agreement related to Iran’s nuclear program, the details of which are being negotiated, to ensure Iran doesn’t acquire nuclear weapons. A non-nuclear Iran is good. Concomitantly, part of the deal involves ending Iran’s oil sector sanctions — in place since 2011. It’s time to focus on that impact, which is more complicated and has a greater influence than many realize.

The world currently uses roughly 93 million oil barrels per day, yet 94 million barrels are produced. Iranian sanctions being lifted (as early as July) would dramatically increase their production, further exacerbating oil’s over-supply which has reduced prices from $107 a barrel last summer to around $50 now.

The Organization of Petroleum Exporting Countries produces roughly 40 percent of current supply. Russia and Venezuela, both in serious economic distress, are generating 9.7 million (10 percent to 11 percent), and 2.1 million barrels a day, respectively. Brazil produces 2.4, Canada 3.6 and the United States currently at 9.4 million barrels a day — the most ever.

On demand not much change is anticipated, with no increased consumption expected in the European Union or China. With sanctions lifted, Iran could quickly add 300,000-plus barrels a day, perhaps reducing the per-barrel price $3 to $5. Longer term, conceivably in 2016, exports could surge radically to as much as 4 million barrels per day, which could reduce prices by another $15.

For our economy, low oil prices mean low gas prices (average regular gas is around $2.42 per gallon). That’s good, not just for consumers but for our diversified economy. Think of the things transported that cost less — foods, building and manufacturing materials and other goods. Sectors like transportation, construction and autos will benefit, even tourism. Families, saving $700 this year due to low prices, may get their motors running and head out on the highway!

Oil shale production

The flip side: Remaining profitable will be rough for some energy firms. Larger varied-product companies will be, generally, OK. Heck, some produce chemicals and plastic products that benefit from cheaper oil. Conversely, two sector segments are already experiencing problems. One: newer drillers and related businesses involved in upper Plains states’ oil shale production; and two: renewable fuels companies that were money-makers, but are having a tougher time now.

The challenging balancing act that needs to be reached on oil supply, demand and the resultant prices is multifaceted, at best. What we know is that oil is a global commodity like none ever witnessed. It bears scrutiny because it can impact us in countless ways.

Former U.S. Trading Commissioner Bart Chilton is a senior policy advisor at the global law firm DLA Piper. Distributed by Tribune Content Agency, LLC.