Iran and Petroleum Prices

One of the overlooked stories of 2014 was the causes of and the geopolitical implications from the dropping oil prices. Numerous articles were written covering aspects of it, yet so few actually tried to look at the situation from the most broad of perspectives.

As everyone knows, the price of oil per barrel and at the pump has dropped over the last few months, mostly as a result of the relationship between demand and supply changing. Supply has been ramped up, especially by US producers. The United States now produces the most oil it has since 1985, and more than all of the OPEC countries including Saudi Arabia. At the same time, OPEC is also producing record amounts.

Many of the countries in OPEC have oil-dependent economies, and fluctuations in the price of oil affect the way their government operates. The budgets are set to expect a certain price of oil, and if the price drops below this, they will have budgetary problems. Iran in particular is facing difficulties, as the sanctions implemented against the Islamic Republic, combined with a lower price of their most important export has greatly reduced potential revenues.

Even though many of the OPEC countries are now facing possible budget deficits, the cartel agreed to not withhold supply and drive up the price of oil. It appears as though the Saudis and the Gulf Nations are willing to withstand lower prices in the short term, because it damages their bitter rival the Iranians, and OPEC's diminished global influence due to US shale oil producers.

Some have framed this as a purely anti-Iran move, but it is a bit more complex than this. If the OPEC members reduce supply, they are not only working with US oil companies, they are acting in a manner that is only beneficial in the short-term. By working together to keep oil prices low, they will soon drive many of the US shale oil companies out of business.

Fracking (shale oil extraction method) was adopted by American (and Canadian) companies because oil had previously been significantly more expensive, and the fracking process can require a higher break-even point to be profitable. If these companies are allowed to continue to operate (by keeping oil prices high), the damage to OPEC countries will continue. Conversely, if these companies are driven out of business, OPEC has a good chance to regain it's control over world petroleum markets.

The US has long had a policy of utilizing Middle Eastern oil over North American for geo-strategic reasons (see citation in my previous blog). Oil production's increase in North America is striking. Is this a last ditch effort to obtain as much shale oil as possible before the environmentally-damaging process is banned? Is there another "back-up" supply of extractable petroleum or is this the US's last 'trump card' in the oil market?

In some ways this looks like a plot between the Saudis and Americans to damage Iran, Russia and Venezuela financially, but there are quite a few other angles which complicate the situation greatly. Lastly, the insistence by Iran that OPEC cut production, shows Iran's financial woes are very real, and that economic mismanagement by the previous administration in conjunction with external pressures have seriously damaged the economy.

Why sanction the Iranian Auto Industry?

Today the United States announced a few more sanctions on Iran intended to "further tighten U.S. sanctions on Iran and isolate the Iranian government for its continued failure to meet its international obligations."

The targets of the sanctions include the Iranian Rial, the automotive sector, and any "material support to the government of Iran". 

At first I thought it strange that the auto industry would be targeted, but then I remembered an article published by Forbes from last month about how there should be sanctions imposed upon Iran's auto manufacturing industry. 

The author's main argument for sanctions is that Iranian owned car companies enable access to 'dual-use technology for Iran's nuclear designs'. The evidence that he uses for this is that there are gas cylinders produced for hybrid cars by an Iranian owned factory in Germany. These "…included carbon fiber and hardened steel – key components of Iran’s second generation nuclear enrichment centrifuges. It also had sophisticated machinery in its inventory, which can be used both to make cylinders and manufacture centrifuges." 

The problem here is that MCS, the operator of the factory, is not an Iranian car company (though as the Iranians have clearly demonstrated, their clever usage of shell corporations make determining the true owner of any company quite difficult) although the author claims that auto companies are the shadow owners of MCS. The original Washington Post article (referenced in the Forbes piece) does not describe the factory as one which creates auto-parts, but rather "high-pressure gas tanks". In fact, the word "auto" or any of its derivatives is found only once in the article where it states: "One of the dual-use materials at MCS was carbon fiber, which is often used in the aerospace and automotive fields".

So why does the author insist on sanctioning the automobile industry? The Washington Post article states that Iran has been "scouring the world for carbon fiber". High quality carbon fiber is evidently a key part of advanced stage centrifuges and so, there apparently are already sanctions on Iranian purchases of high quality carbon fiber. According to ISIS (Institute for Science and International Security), as a result of this, Iran has begun to produce its own carbon fiber (albeit of low quality).

I may be wrong, but from what I understand of the evidence, the target of the sanctions is not the actual industry itself, but those who run it (IRGC), who are also known to have attempted to proliferate materials important for nuclear activities. Therefore the argument should not be that the industry, the cars or the materials themselves that are a problem, but rather that those who lead the industry are the problem and the reason for such sanctions.

While I think that the argument on Forbes is problematic, it may not even be connected to the new Obama sanctions. The sanctions were created by executive order rather than by Congress, so instead of having to try to force an increasingly pig-headed and obstinate House of Representatives to agree with him if he wants to remove the sanctions in the future, Obama may have created a situation where he himself is able to remove them as a bargaining chip with the Iranians. 

My thoughts on election finances (circa 2005)

I wrote this when I was still in high school and forgot about it until Eric Garland's wonderful Twitter rant yesterday (reproduced in blog form in his website). 

In America politicians create laws.  Although our officials are democratically elected, they do not necessarily represent the average American.  Political campaigns run on dollars.  It is effectively impossible to win any significant election in this country without access to a personal fortune, or friends with great wealth.

In our society, money is often valued more than “life, liberty and the pursuit of happiness”.  People make political contributions only to causes that they believe in strongly, or feel will help better their own lives, often monetarily.  Big business and high rollers will not provide money to candidates who might hurt their interests.  A prospective candidate can garner political donations by making promises to these special interests, guaranteeing advocacy of legislation that promotes their business and thirst for money. American politics and democracy are not about applying the will of the people, they are about advancing the agenda of the wealthy elite who run our society, often into the ground.