Nassef M.

Adiong

The Foreign Policy of the Islamic Republic of Iran towards

the Organization of Petroleum Exporting Countries (OPEC)

Scholarly Essay

Document Nr. V139271

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 The Foreign Policy of the Islamic Republic of Iran towards the

Organization of Petroleum Exporting Countries (OPEC)

By Nassef M. Adiong

OPEC member states play a crucial role as the major exporters of crude oil, the

largest single internationally traded commodity, both in volume and value. They

hold 77% of the world's proven oil reserves, with a production capacity of 27

million barrels a day, and a production level of 25 million barrels a day (bpd).

(C.B. 1990:2476)

Oil Industry and the Economy

The Islamic Republic of Iran, one of the founding members of Organization of

Petroleum Exporting Countries (OPEC), holds 11% of the world’s proven oil

reserves and around 15% of its gas and as the second biggest producer within

the organization (Ghezelbash 2005:20). Iran both affects the international

petroleum market, and is widely affected by it.

Some 75% of the state’s hard currency income comes from crude exports,

while the sale of oil (and to a lesser extent gas) amounts to around 20% of

Iran’s gross domestic product (Ghezelbash 2005:22). No doubt, Oil revenues

constitute over 80% of its total export earnings and 50% of its GDP. The country

earned more than $40 billion from oil exports this year, an increase of 25% over

last 2007. (Luft 2005) Denying revenues to Iran would no doubt hurt its

economy and might even spark social discontent.

Primal Vision in OPEC, Mission to the Economy

Iran’s objective is to raise quotas, output, and increase the oil price to

produce more revenues and avoid high inflation risks because it wants to import

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various types of goods and services, primarily military and industrial goods, and

construction services (Heal & Chichilnisky 1991:39). The Ministry of Petroleum

has announced that in order to reach the objectives of the 20-Year Outlook, and

to maintain its OPEC production share, Iran’s crude production must reach 5.5

million bpd in 2010 and 7 million bpd in 2015 (Ghezelbash 2005:25).

The state has sought to promote the development of non-oil industries to

diversify its sources of income and also reduce the shocks to the economy from

oil price fluctuations. Iran’s government earned $44.6 billion from oil and spent

$25 billion on subsidies – for housing, jobs, food and cheap gasoline – to buy off

interest groups (Ghezelbash 2005:26).

But the overall impact of an oil price and crude production increase on Iran’s

real GDP cannot be determined a priori because increased oil export revenues

transferred to OPEC are in part returned to her industrial economy. The impact

on GDP depends on whether this takes place in the form of respending, direct

investment, portfolio investment or loans. (Fabritius & Petersen 1981:225)

Though Iran’s own policy at the moment is to maintain its share of 14% of OPEC

production.

The demand of OPEC countries for a fairer price based on market principles of

demand and supply creates a hue and cry in the oil guzzling countries and fear of

destabilization of the world economy, which in any case they manipulate and

control. (Antia 2000:3616) However, OPEC revised its world oil demand growth

forecast for 2008 down to 1.17% from 1.20% due to weak global economy. It

pointed out that its members especially Iran had increased production despite

the lack of demand to help calm the markets.

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Maslahat to the Arab World

Emphasizing the goals of Maslahat, a Persian term means position of

goodness or interest, has described as an acquisition of benefits and getting rid

of damaged to the extent that the religious aims are preserved. Khomeini’s

foreign policy viewpoints are inscribed into the Maslahat on non-reliance on the

global powers, subservience to domination, preservation of the existence and

territorial integrity of the country, and negation of isolationism. (Tehrani

2006:78) These principles have had not help Iran’s cordial relationships with the

Arab world and led to a dissonant perception in the international community.

Iran’s oil industry, nationalism and the fear of imperialism are more present

than elsewhere in the region. Filled with historical ambiguities and ethnic

sensitivity in the Arab-Iranian relationship, wherein Arabs feel that Iran’s

intention is to become a regional hegemon through a motivated strategy towards

OPEC in order to increase military spending and capability; an absolute travesty

in the security impact within the region if ever happens.

Consequently, for the past 25 years, Iran and Saudi Arabia is still not in good

terms because the Saudis had never apologized for supporting Iraq in the war of

1980-88 or for the killing of 402 Iranian pilgrims in clashes with Saudi security

forces at an Iranian-led rally in 1987 – a crisis that led to boycott the Hajj in

1988-91. One senses that the Saudis remain dismissive of Iranians, whom many

Wahhabi Sunnis consider them to be infidels because of their Shiite faith.

Simplifying the Iranian view, Saudis are socially backward religious extremists,

while their society is open and modern. (Marcel 2006:163)

In contrast, recent events manifest Iran’s Maslahat to some Arab countries,

when Kuwait’s declared an official apology to Iran for supporting Saddam

Hussein in the Iran-Iraq war, it appears that the Iranians have forgiven their

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neighbor following its visit to the country to offer support on 2005 (Marcel

2006:164). Also, Iran has been seeking to improve relations with the Iraqis since

the removal of Saddam, whom they felt were suffering.

Iran and OPEC

Positive Side: In 2004, Iran came up with an unusual contractual solution to

thwart OPEC member’s investment problems, called buyback. The Iranian

buyback scheme differed from the conventional production sharing agreement

(PSA) in its shorter time span and fixed rate of returns on investment. Under

PSA, the contractor has about 30 years to explore, develop and operate a field,

with profits from production being divided between the parties. Until recently,

buybacks specified a five to seven-year exploration and development period after

which operation of the field reverted to its OPEC member’s national oil company

and the contractor’s initial investments was reimbursed. There would be a fixed

rate of return (15-17%) on profits. (Marcel 2006:42)

Negative Side: Recently, Iran threatened to double its oil output and start an

oil price war, but the Iranian threat sounded hollow to many officials and

experts. They said Iran was not capable even of meeting its current production

quota because of Iraqi air attacks on its oilfields and tankers. Also, according to

OPEC, Iran would not be able to market any increased output because the United

States, France and Japan are reluctant to buy Iranian oil. (Ibrahim 2008)

Despite Iran's tough talk, Kuwaiti and Saudi officials left little doubt that they

were backing Iraq's request to increase its official production quota, even if it

meant Iran would not join in any agreement. And Kuwait and Saudi Arabia would

be delighted to see Iran assume responsibility for any collapse of OPEC's price

structure, further isolating that nation. In making its threat, Iran accused Saudi

Arabia and Kuwait of deliberately depressing oil prices to hurt its war effort

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against Iraq, with which they are allied. Iran said it would not sign any OPEC

agreement that granted Iraq a bigger share of OPEC's total output. (Ibrahim

2008)

According to Gholam Reza Aghazadeh, Iran's oil minister, if OPEC ignores

Iran's legitimate complaints, then Iran will feel free to produce as much oil as it

can, throwing already depressed oil markets into turmoil. Iran's output now is

about two million barrels a day that could be doubled and sold at whatever the

market will bear. (Ibrahim 2008)

Challenges in the Iran-OPEC Relationship

In many oil and gas producing countries such as Saudi Arabia, Iran, Algeria,

Venezuela, and Indonesia, the needs of the population are growing faster than

the oil rent. Iran will need to expand oil and gas production in order to increase

revenues but that even under relatively favorable oil revenue scenarios; the

hydrocarbon sector (crude oil) will no longer be able to give the same degree of

support to the rest of the economy for more than a few years.

In the economic sphere, the principal challenges for both Iran and the OPEC

in the next decade are:

ƒ How will Iran continues to bully OPEC when she needs approximately $62

to $97 a barrel in the next 10 years to balance its external account? Even

high oil prices have allowed the central banks of OPEC’s conservative

members e.g. Saudi Arabia, Iraq, and Kuwait to increase their cash

cushion against any future downturn and to build up huge sovereign

wealth funds. (Merzaban & Webb 2008:B-4)

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 ƒ To maintain and extend the reform process to support a higher growth

rate by eliminating identified slacks and distortions in the price behavior

and structure, and output quotas.

ƒ To enable the “old” non-hydrocarbon economy to survive in the transition

of Iran’s market economy. This will require reducing its fiscal deficits and

providing foreign exchange to pay for a greater share of its imports. It will

involve, among other steps, speeding up privatization and attracting

foreign direct investment. (Marcel 2006:241)

In to-to, Iran needs OPEC as it needs her, they should be able to establish a

harmonious working environment notwithstanding some cultural differences,

religious and political gaps, and even ethnic dissimilarities.

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 Works Cited

Books

Heal, Geoffrey & Chichilnisky, Graciela. Oil and the International Economy.
Oxford: Clarendon Press, 1991, p. 39.

Marcel, Valérie. Oil Titans: National Oil Companies in the Middle East.
Washington, D.C.: Brookings Institution Press, 2006,
pp. 42-3, 163-4 and 240-2.

Tehrani, Nasser Mazaheri. Imam Khomeini and the International System: A

Collection of Articles. Tehran: International Affairs Department, 2006,
pp. 71-102.

Monographs of Journals and Newspapers

Antia, N. H. “Oil Crisis.” Economic and Political Weekly Vol. 35, No. 40
(Sep. 30 - Oct. 6, 2000): p. 3616. URL souce: <http://www.jstor.org/
stable/4409812> Accessed: 23 September 2008

C. B. “OPEC Thirty Years.” Economic and Political Weekly Vol. 25, No. 45
(10 November 1990), pp. 2476-2477. URL source: <http://www.jstor.
org/stable/4396960> Accessed: 23 September 2008

Fabritius, Jan F. R. & Petersen, Christian E. “OPEC Respending and the

Economic Impact of an Increase in the Price of Oil.” The Scandinavian
Journal of Economics Vol. 83, No. 2 (1981): pp. 220-236.
URL source: <http://www.jstor.org/stable/3439897>
Accessed: 23 September 2008

Ghezelbash, Ali. “The Oil Weapon” in Unveiling Iran. Heartland Eurasian

Review of Geopolitics: Cassan Press (April 2005): pp. 20-28.

Ibrahim, Youssef M. “Iran and Arabs Clash in OPEC on Oil Policy.” New York
Times (11 July 2008). URL source: <http://query.nytimes.com/gst/
fullpage.html?res=9B0DE5D61130F933A25751C1A91948260&sec
=&spon=&pagewanted=all> Accessed: 22 August 2008

Koppel, Ted. “Will Fight for Oil.” New York Times (24 February 2006).
URL source: <http://www.globalpolicy.org/empire/intervention/2006/
0224fightforoil.htm> Accessed: 23 August 2008

Luft, Gay. “Oil puts Iran out of Reach.” Baltimore Sun (16 August 2005).
URL source: <http://www.baltimoresun.com/news/opinion/oped/balop
.iran16aug16,1,5228150.story?coll=bal-oped-headlines>
Accessed: 22 August 2008

Merzaban, Daliah & Webb, Simon. “What Happens If High Oil Prices Suddenly
Come Down?” Manila Bulletin Vol. 425, No. 25 (25 May 2008): p. B-4.