A crew man walks along the deck of oil tanker ‘Devon’ as it prepares to transport crude oil from Kharq Island to India in Bandar Abbas, Iran. (Photographer: Ali Mohammadi/Bloomberg)

Iran’s Regime Hasn’t Changed, But Global Oil Has

(Bloomberg Opinion) -- Bloomberg Opinion is marking the 40th anniversary of Iran’s Islamic Revolution with a collection of columns from around the world.

John Bolton did not get his wish. A few months before he was appointed National Security Adviser last year, Bolton wrote an op-ed arguing that:

America’s declared policy should be ending Iran’s 1979 Islamic Revolution before its 40th anniversary.

The anniversary is upon us and the revolution remains, stubbornly resisting 40 years of war, sanctions, flashes of internal dissent and any number of bellicose op-eds. But if things haven’t changed much in Tehran throughout that period, they certainly have in the industry that defines its economy and its neighborhood: oil. American dependence on Middle Eastern oil has waned, along with U.S. interest in engagement with the region. The latter may look like a victory for Iran, but it portends a more turbulent future for the Islamic Republic and threatens its economy.

First, a reminder of where it all began. The fall of the Shah of Iran in 1979 touched off the sharpest price shock of the past 40 years, with oil more than doubling in real terms that year. That shock, along with the crisis provoked by the seizure of more than 50 American hostages inside the U.S. embassy, panicked and humiliated a superpower already reeling from Vietnam, Watergate and, coincident with Iran’s turmoil, the Soviet invasion of Afghanistan. Iran also menaced Middle Eastern oil supplies to the U.S. and its Cold War-allies in Europe and Asia. Little wonder the Islamic Republic got so deep under the skin of Washington’s hawks.

Iran’s Regime Hasn’t Changed, But Global Oil Has

Iran has since settled into a strategy of disruption, using direct action or proxies against a regional order underwritten by American power. This has paid off in some respects; Iran now has influence across a broad swath of territory stretching across Iraq, Syria and into Lebanon.

But in the meantime, the U.S. has had a revolution of its own, in shale.

Iran’s Regime Hasn’t Changed, But Global Oil Has

As a result, U.S. oil imports from the Persian Gulf are now less than 10 percent of consumption, and dependence on foreign barrels has fallen in general, with net imports heading quickly toward zero.

Iran’s Regime Hasn’t Changed, But Global Oil Has

This doesn’t mean the U.S. is immune to the vagaries of the global oil market. Its producers want to export and its refiners prefer some foreign types of crude (such as Venezuela’s) to the homegrown kind. But we are a world away from 1979, when the U.S. relied on imports for almost half its oil demand and OPEC produced almost one in every two barrels. Peter Zeihan, whose book “The Absent Superpower” traces the links between the shale boom and the end of the post-World War II order, sums up the new situation like this:

This [U.S.] administration and all future administrations will use disruption in oil. The U.S. is emerging as the biggest disrupter in oil — and that’s by design.

In just the past year, President Donald Trump pulled out of his predecessor’s nuclear deal with Iran, persuaded Saudi Arabia to open up the taps, granted waivers that blunted the impact of Iranian sanctions, and announced the U.S. was done in Syria. He kicked off 2019 by effectively blocking imports of Venezuelan oil. In other words, shale has emboldened the White House to sanction not one but two major OPEC producers at once. Whether the oil market can absorb this without a price spike is an open question. As Helima Croft, head of commodity strategy at RBC Capital Markets, described Trump’s approach: “We’re about to find out: Are you lucky, or are you good?”

Meanwhile, U.S. disengagement from the Middle East is having an impact on another regional power, Saudi Arabia. The kingdom has undergone something of a revolution of its own as Crown Prince Mohammed bin Salman has centralized power into his own hands. Riyadh’s sudden interest in economic reform and a notably more aggressive foreign policy owe at least something to its realization that American support may not remain rock-steady. In the short term, with Washington on its side, Saudi Arabia will try to weaken its Iranian adversary as much as possible. In that sense, U.S. retreat may actually increase the risk of turmoil for Tehran. 

And lest we forget, even as Iran’s revolution has endured, the domestic oil industry that helps fund it has never fully recovered, with production around half what it was before the revolution. Sanctions are an obvious reason. Another is the regime’s prickliness with foreign oil companies during periods when they could invest; most were deterred by Tehran’s terms. (Contrast that with how Russia courted the likes of BP PLC to revive production after the Soviet Union’s collapse.)

Even if sanctions were suddenly lifted, oil majors are unlikely to beat a path to Iran unless offered generous inducements. Concerns about climate change and long-term oil demand have intersected with an investor backlash and the shale boom to discourage multi-billion-dollar, multi-year bets on new projects in inhospitable climes. And while further turmoil in the Middle East might advance Iranian regional objectives and boost oil prices, it would both discourage international investment and encourage conservation of oil demand.

So, even as Iran celebrates its 40th anniversary, the ground is shifting in ways that threaten the regime. Reduced American engagement in the Middle East has expanded Iran’s influence, but it also spurs other regional players to pressure the Islamic Republic. The changes in oil flows weaken Iran’s position in a market vital to its economy. And the global oil market is itself confronting existential pressures that will keep building. Tehran has resisted regime change, but changes in the wider world should temper any celebrations.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Liam Denning is a Bloomberg Opinion columnist covering energy, mining and commodities. He previously was editor of the Wall Street Journal's Heard on the Street column and wrote for the Financial Times' Lex column. He was also an investment banker.

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