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The week in energy: Iran and the oil price


When Iran signed the deal over its nuclear programme with the US, China and other leading powers in July 2015, world markets were well-supplied with crude. Oil prices had been rising in the first five months of that year, but started to drop back again as it became clear that Iran would soon be able to resume unlimited sales to customers around the world. The international sanctions that led to the deal had, at their most effective, taken about 1.4m barrels a day off the market. When they were lifted in January 2016, the surge in Iranian oil exports drove prices down below $30 a barrel.

This week, as President Donald Trump moved to withdraw the US from that deal and reinstate sanctions, the oil market backdrop was very different. The curbs on output agreed in late 2016 by Opec, Russia, and 10 other oil-producing countries have been r emarkably effective in draining away the glut of crude on world markets, helped by robust demand and the collapse of Venezuela’s industry. Oil prices have more than doubled from their 2016 lows, with Brent crude rising above $77 a barrel this week, for the first time since 2014. US consumers are noticing that the average household will spend hundreds of dollars more on fuel this year than it did in 2016.

That mounting pressure on US consumers, especially those on lower incomes and in rural areas, explains why Steven Mnuchin, the US Treasury secretary, has been talking to other oil-producing countries about increasing output to make up for lost Iranian exports as sanctions bite. Mr Mnuchin did not name the countries in question, but speculation naturally centred on Saudi Arabia, which both has most of the world’s unused oil production capacity and is a strong supporter of the US withdrawing from the Iran deal. The Saudi energy ministry said the kingdom was committed to sustaining growth in the world economy, implying that it did not want oil prices to rise too sharply. It added that Saudi Arabia would “work with major producers within and outside Opec as well as major consumers to mitigate the impact of any potential supply shortages”. That line about working with other countries was later emphasised by a source familiar with the Saudi government’s thinking, who clarified its position: Riyadh was prepared to act, but “in co-ordination with other producers”, not unilaterally. Kuwait and Iraq have been mentioned as suppliers that could also increase their output to make good any shortfall in Iranian exports.

The pressure on oil supplies is being exacerbated by the accelerating crisis at PDVSA, Venezuela’s national oil company. Late last week, ConocoPhillips, the US oil group, secured court orders giving it control of PDVSA’s assets on two Caribbean islands, Bonaire and St Eustatius, in pursuit of its $2bn compensation award for assets expropriated in 2007. The Miami Herald reported that Conoco’s move had “established a dangerous legal precedent” that could lead to PDVSA being swamped by a wave of similar claims. Bloomberg’s Lucia Kassai suggested in the Houston Chronicle that the company’s action could be “worse for Venezuela than US sanctions”.

With oil exports from Iran and Venezuela expected to decline, the continued boom in the US shale industry is very welcome, for the Trump administration and consumers alike. But light sweet US shale oil is not a perfect substitute for the typically heavier and sourer Iranian and Venezuelan crudes, and American production companies are being held back from achieving their full potential by a shortage of pipeline capacity at the heart of the boom in west Texas. The transport bottlenecks have weakened the price of crude in the Permian Basin at Midland in west Texas, sending it down this week to $13.25 below the standard US benchmark crude, West Texas Intermediate.

On Thursday analysts at Bank of America suggested that oil could return to $100 a barrel. It certainly could do, of course: it was at that level just four years ago. But anyone who puts a lot of faith in that outcome should probably take a look at this 2011 paper published by the US Federal Reserve. Its conclusion: at horizons longer than six months, the lowest errors come from forecasts that the real price of oil will remain the same. 

California has been the most ambitious of US states in advancing renewable energy, and this week it took another bold step forward. The California Energy Commission on Wednesday agreed to change building regulations so that from 2020 all new homes up to three stories high will have to be fitted with solar panels. The decision received a mixed response, including plenty of criticism. Michael Shellenberger, president of the pro-nuclear group Environmental Progress, who is running to be governor of the state, said the mandate would “make housing more expensive, increase electricity prices, and transfer wealth upwards” without significantly reducing carbon emissions. James Temple of the MIT Technology Review agreed, arguing that “this feel-good change to the building code is a questionable public policy for cutting greenhouse-gas emissions”, because rooftop systems are a more expensive way of developing solar power than larger utility-scale projects. James Bushnell in the Sacramento Bee similarly argued that rooftop solar was expensive, and warned that the plan would exacerbate California’s problem with its glut of electricity generated in the middle of the day. Matt Yglesias for Vox argued that simply building more homes in California would do more to cut emissions.

However, Adam Browning of the group Vote Solar argued that the regulations would actually be a good way to drive rooftop solar development, because the mandate would reduce the “soft costs”, including customer acquisition, permitting and financing, that can amount to two-thirds of the price of a system. The California Energy Commission argued in its analysis that the regulations were “cost effective in every climate zone under the base case assumptions”. The decision lifted the shares of Sunrun, the largest US independent residential solar company, by 15 per cent. Michael J. Coren of Quartz argued that “even without regulations like this, building homes without solar panels may not make financial sense within a decade or two”.

India’s coal imports rose sharply in the first quarter of the year, and the country is on course to increase purchases from abroad for 2018 as a whole, after two consecutive years of decline in 2016-17. The market is shifting gradually away from the fuel that provides more than three quarters of India’s electricity, however. Sushma U N and Nupur Anand reported for Quartz on how “cheap renewable energy is killing India’s coal-based power plants”. Ajay Kumar Bhalla, India’s power secretary, told Bloomberg Quint that efforts were being made to resolve the financial stress on coal-fired power plants. He added that the government had been looking at plants with about 40,000 megawatts of capacity, which is about 20 per cent of India’s entire coal-fired generation fleet.

There has been a bizarre story in the US about how actors were paid to attend a public hearing for a proposed new gas-fired power plant in New Orleans, to show support for the project. On Thursday Entergy, the company planning the plant, published the conclusions of its internal investigation into the affair. It said that it had hired a public affairs firm called the Hawthorn Group, which had in turn, “without [Entergy’s] knowledge or approval”, retained a subcontractor called Crowds on Demand, which paid individuals to go to two public meetings. Entergy said it had “fully expected that Hawthorn would identify legitimate supporters for the plant and encourage them to attend the meeting”.

And finally: the new Marvel superhero movie Avengers: Infinity War is pretty silly, even though the FT’s critic Danny Leigh liked it a lot. The film has, however, inspired an interesting debate over the motivations of the villain Thanos, who seems to hold hardline Malthusian views on population growth and resource scarcity. Investopedia even ran a quiz: “Who said it: Malthus or Thanos?”

Other views

Nick Butler — Access to energy is an essential step in African development

Ellen Wald — How to save the Saudi golden goose

Emily Atkin — Renewable energy Is surviving Trump

Jason Bordoff — Trump’s Iran policy Is blowing up his energy agenda

Luigi Scazzieri — The EU has little choice but to try to keep the Iran deal alive

Quote of the week

“Saudi Arabia remains committed to supporting the stability of oil markets for the benefit of producers and consumers alike, and for sustaining growth in the global economy.” — A spokesman for the Saudi energy ministry signals that the kingdom is prepared to help increase oil supplies to stop prices rising too high as the US attempts to curb Iran’s oil exports.

Chart of the week

Coal still dominates India’s fuel mix for power generation, but renewable energy is now starting to close the gap a little, as this report from the government’s Central Electricity Authority shows. In the past year, India has added about 5,000MW of generation capacity in coal-fired plants, but 19,000MW in renewable energy. Solar power has been growing particularly rapidly, overtaking wind in terms of generation over the past year. In total, renewable sources excluding large-scale hydro provided 6.1 per cent of India’s electricity in February 2017. A year later, that share was up to 7.6 per cent.

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