4 ms·

Iran's oil is not expensive to extract. These aren't marginal break-even prices on each barrel of oil...rather they're how much their current oil production wou

Iran's oil is not expensive to extract. These aren't marginal break-even prices on each barrel of oil...rather they're how much their current oil production would have to be sold for in order to balance their national budget, which includes defense and healthcare and whatnot. 79% of Iran's exports are unrefined crude oil: https://commons.wikimedia.org/wiki/File:Islamic_Republic_of_Iran_Exports_Treemap_2017.svg https://commons.wikimedia.org/wiki/File:Islamic_Republic_of_... (edited to 2017) Countries typically "go bankrupt" in a practical sense (with very noticeable real-world effects on the local citizens) when their foreign reserves run out.

bsanr2 6y ago
But is their ability to produce or sell refined vs unrefined oil effected by the sanctions? Maybe not directly; maybe in how they're able to access funding for infrastructure, for example?
- rckoepke 6y ago
  Partially. The USA offers some of the best technology for extracting and refining oil, but no US citizens or companies can offer their expertise to Iran. However, most oil companies are international and have headquarters in multiple countries - so quite a few large oilfield service companies can do business with Iran as long as they don't cheat the system to provide USA-based services. Schlumberger, a French/Texas/Dutch/UK company, earned themselves the largest international sanctions fine ever for skirting the rules. It wasn't illegal for them to work with Iran, even though they are headquartered in Houston, TX. However, they used US-based personnel and assets and now are barred from doing any business with Iran as part of the penalties. So Iran does find it difficult to get some of the latest technological advantages. That said, their geology doesn't demand super high tech solutions to extract oil. And they could be using 1960's technology to refine their oil into higher value products but they simply aren't, for reasons I don't understand. The details of the sanctions have changed a lot over the past 10 years. Between 2013 and 2016, sanctions were globally supported and it was extremely difficult for Iran to sell its oil. Now it's just a few countries embargoing Iran, so Iran seems to be able to sell nearly as much as it wants, presumably at near-market prices.
  - smnrchrds 6y ago
    > Iran seems to be able to sell nearly as much as it wants, presumably at near-market prices. Not really. I am no expert, but my understanding is that US sanctions bar Iran from accessing any financial services by US institutions or in US dollars. Apparently, they have jurisdiction to enforce that if a transaction uses US dollars. Unfortunately for any country who provokes the ire US, currently USD is the only real option for international trade. Thus, even if Iran sells its oil, it cannot get access to the funds it generates. Some European countries tried to create an alternative for the global financial transaction system specifically for Iran to be able to sidestep the sanctions. It would have had serious limitation, e.g. allowing Iran to only purchase food and medicine. But even that has not been successful. Only a single transaction has been done using the new system so far. https://www.gov.uk/government/news/instex-successfully-concludes-first-transaction https://www.gov.uk/government/news/instex-successfully-concl...
    - cturner 6y ago
      "currently USD is the only real option for international trade" I think you have conflated currency matters with sanction matters. I will attack that here, but much of your point stands. My points here: international business tends to be done in USD only because it is convenient, and no business ever failed to happen due to that convention. International trade tends to happen in terms of the USD because USD is convenient. Factors: (1) The world's largest economy does its business in USD; (2) There are many large lenders in the US and (3) There is a free and liquid FX market for USD. Many companies reduce their friction by working in USD. They borrow some money in USD and then spend some money in USD, and thereby avoid paying a fee to their bank's FX desk. Instead of managing a complex risk situation between their home currency and a dozen others, they concentrate it into a simple risk situation of their home currency vs USD. Iran could put oil in ships, and send it to China. China could put gold in ships and send it to Iran. Or - far more easily - Iran could price its transaction in terms of New Zealand dollars, and the two parties could make adjustments to a ledger in a tax haven. The USD conventions is akin to the role of English as lingua franca. It's convenient., or China The other part of your point is that US sanctions are harsh and far-reaching. No arguments against that here. Would I trust billions of dollars to a tax haven bank, or in countries with a strong rule-of-law tradition? Also, any time you want to spend substantial money in the developed world, the other party is going to need evidence that it is not sanction affected.
- alextheparrot 6y ago
  Iran had a 69% decrease in oil exports (In terms of barrels exported) between 2018 and 2019, as a result of US sanctions [1]. I don't think refined vs unrefined is the biggest issue, given that a reduction in quantity would be hard to recover in terms of quality. [1] https://fred.stlouisfed.org/series/IRNNXGOCMBD https://fred.stlouisfed.org/series/IRNNXGOCMBD
  - rckoepke 6y ago
    Indeed, a 70% drop in exports would be difficult to recoup. However, for sake of understanding: currently about 4-6% of global oil and gas is used to produce plastics. This represents about $600 Billion in total market value. The total global crude oil market is about $1,800 Billion if oil is $50/bbl. So it seems that you get roughly 5x higher revenue on a barrel of oil turned into plastic than sold in its unrefined state. Probably much more if oil is $20/bbl.
    - alextheparrot 6y ago
      Plastic is pretty far away from "Refined vs Unrefined", refining adds about $10-20 of value per barrel [1]. At Iran's volume, that is billions of dollars, but not a 5x in revenue. [1] https://www.canadianfuels.ca/website/media/PDF/Publications/Economics-fundamentals-of-Refining-December-2013-Final-English.pdf https://www.canadianfuels.ca/website/media/PDF/Publications/...
      - rckoepke 6y ago
        I was referring to my statement earlier in this thread: > And they could be using 1960's technology to refine their oil into higher value products but they simply aren't, for reasons I don't understand. "Refine" was used loosely, but the bulk of the plastics market are still relatively simple products that don't necessarily require extremely high technology to produce. It's still a cutthroat commodities business, but producing a little plastic has the potential to add a lot of dollars. You can see this happen in Saudi Arabia over the past decade. They worked with Dow Chemical to produce the "Sadara" plant - a very large refinery and chemical plant. Crude oil made up over 80% of Saudi's exports from 2010-2014. The first phase of Sadara began selling product in 2015, and the final major piece (of 26) was commissioned in 2017. When Sadara opened its first phase, crude oil dropped from ~80% of export dollars in 2014 to just 55% in 2015. So yeah, opening a chemical plant can massively change your export profile. Now, this data includes a huge drop in oil price after 2014 so it's not entirely fair. But is is reasonably fair vecause it wasn't just oil prices that dropped - chemicals+plastics dropped up to 50% as well. Their $ value in exports stayed constant despite the price drop, indicating a large surge in export volume. And this is largely driven by the construction of a single integrated refining facility.
- sumedh 6y ago
  Indian refineries used to import Iranian crude and then sell some of processed oil back to Iran but those refineries have significantly scaled back their imports because of US sanctions.
ramchip 6y ago
More recent chart (2017 rather than 2012) - this one reports 72%: https://commons.wikimedia.org/wiki/File:Islamic_Republic_of_Iran_Exports_Treemap_2017.svg https://commons.wikimedia.org/wiki/File:Islamic_Republic_of_... Source: https://oec.world/en/visualize/tree_map/hs92/export/irn/all/show/2017/ https://oec.world/en/visualize/tree_map/hs92/export/irn/all/...
fyfy18 6y ago
Why can't they just take loans like most Western countries do to balance their budget? The UK has been running at a deficit (£55 billion in the last budget) since 2002. Based on my back of the napkin math, the UK would need to export it's oil (yes, the UK is a net exporter of oil) at $350/barrel to cover that.
- mdemare 6y ago
  There are only a handful of countries that can borrow in their own currency, and borrowing in another currency is very risky.
- rckoepke 6y ago
  > Based on my back of the napkin math, the UK would need to export it's oil (yes, the UK is a net exporter of oil) at $350/barrel to cover that. In a vacuum this isn't really a good-faith argument. It can be used to illustrate limited concepts, as another user did in this thread, but it's not really a valid point in general for anything. That's because the question of "what price of oil does [country] need?" only makes sense for countries where the supermajority of their GDP is based on resource extraction. UK to Iran is not a great comparison because only 4.5% of UK's exports are crude oil. https://oec.world/en/profile/country/gbr/ https://oec.world/en/profile/country/gbr/ Second, trade only makes up 30% of the UK's GDP, meaning it can and does better leverage its domestic production to meet domestic needs. Lastly, the UK has not been nearly as dependent on exports to balance foreign reserves as Iran is. Due to its uncommon status as a global financial hub, I think it has other ways to ensure it can continue to finance trade.
- quintushoratius 6y ago
  > Why can't they just take loans like most Western countries do to balance their budget? Who, exactly, is going to loan them money? If Iran were a person they'd have a sub-600 credit score while seeking a no-documentation car loan. Nobody in their right mind is going to loan them money for non-predatory rates. When we talk about a country taking out loans, we're frequently talking about bonds and, if you're not the US, actually talking to banks via the IMF. Are you going to buy Iranian bonds? Consider the following: - Which asset(s) do you think Iran will use to pay you back? Keep in mind that their largest asset - oil - has a rocky track record. - Loans are more likely to be paid back by a stable government. How stable do you expect Iran to be over the next 10-30 years? How likely is another Arab Spring? - Taking the above into account, what kind of interest rate would be adequate? Is it higher than the Iranians are likely to pay? How much higher is it than they can afford right now?
taneq 6y ago
Ah, so it's the ol' "Our unit price is our running costs divided by our unit sales" trick. Fine in a seller's market but guaranteed to fail in the face of competition.

bsanr2 6y ago

But is their ability to produce or sell refined vs unrefined oil effected by the sanctions? Maybe not directly; maybe in how they're able to access funding for infrastructure, for example?

rckoepke 6y ago
Partially. The USA offers some of the best technology for extracting and refining oil, but no US citizens or companies can offer their expertise to Iran. However, most oil companies are international and have headquarters in multiple countries - so quite a few large oilfield service companies can do business with Iran as long as they don't cheat the system to provide USA-based services. Schlumberger, a French/Texas/Dutch/UK company, earned themselves the largest international sanctions fine ever for skirting the rules. It wasn't illegal for them to work with Iran, even though they are headquartered in Houston, TX. However, they used US-based personnel and assets and now are barred from doing any business with Iran as part of the penalties. So Iran does find it difficult to get some of the latest technological advantages. That said, their geology doesn't demand super high tech solutions to extract oil. And they could be using 1960's technology to refine their oil into higher value products but they simply aren't, for reasons I don't understand. The details of the sanctions have changed a lot over the past 10 years. Between 2013 and 2016, sanctions were globally supported and it was extremely difficult for Iran to sell its oil. Now it's just a few countries embargoing Iran, so Iran seems to be able to sell nearly as much as it wants, presumably at near-market prices.
- smnrchrds 6y ago
  > Iran seems to be able to sell nearly as much as it wants, presumably at near-market prices. Not really. I am no expert, but my understanding is that US sanctions bar Iran from accessing any financial services by US institutions or in US dollars. Apparently, they have jurisdiction to enforce that if a transaction uses US dollars. Unfortunately for any country who provokes the ire US, currently USD is the only real option for international trade. Thus, even if Iran sells its oil, it cannot get access to the funds it generates. Some European countries tried to create an alternative for the global financial transaction system specifically for Iran to be able to sidestep the sanctions. It would have had serious limitation, e.g. allowing Iran to only purchase food and medicine. But even that has not been successful. Only a single transaction has been done using the new system so far. https://www.gov.uk/government/news/instex-successfully-concludes-first-transaction https://www.gov.uk/government/news/instex-successfully-concl...
  - cturner 6y ago
    "currently USD is the only real option for international trade" I think you have conflated currency matters with sanction matters. I will attack that here, but much of your point stands. My points here: international business tends to be done in USD only because it is convenient, and no business ever failed to happen due to that convention. International trade tends to happen in terms of the USD because USD is convenient. Factors: (1) The world's largest economy does its business in USD; (2) There are many large lenders in the US and (3) There is a free and liquid FX market for USD. Many companies reduce their friction by working in USD. They borrow some money in USD and then spend some money in USD, and thereby avoid paying a fee to their bank's FX desk. Instead of managing a complex risk situation between their home currency and a dozen others, they concentrate it into a simple risk situation of their home currency vs USD. Iran could put oil in ships, and send it to China. China could put gold in ships and send it to Iran. Or - far more easily - Iran could price its transaction in terms of New Zealand dollars, and the two parties could make adjustments to a ledger in a tax haven. The USD conventions is akin to the role of English as lingua franca. It's convenient., or China The other part of your point is that US sanctions are harsh and far-reaching. No arguments against that here. Would I trust billions of dollars to a tax haven bank, or in countries with a strong rule-of-law tradition? Also, any time you want to spend substantial money in the developed world, the other party is going to need evidence that it is not sanction affected.
alextheparrot 6y ago
Iran had a 69% decrease in oil exports (In terms of barrels exported) between 2018 and 2019, as a result of US sanctions [1]. I don't think refined vs unrefined is the biggest issue, given that a reduction in quantity would be hard to recover in terms of quality. [1] https://fred.stlouisfed.org/series/IRNNXGOCMBD https://fred.stlouisfed.org/series/IRNNXGOCMBD
- rckoepke 6y ago
  Indeed, a 70% drop in exports would be difficult to recoup. However, for sake of understanding: currently about 4-6% of global oil and gas is used to produce plastics. This represents about $600 Billion in total market value. The total global crude oil market is about $1,800 Billion if oil is $50/bbl. So it seems that you get roughly 5x higher revenue on a barrel of oil turned into plastic than sold in its unrefined state. Probably much more if oil is $20/bbl.
  - alextheparrot 6y ago
    Plastic is pretty far away from "Refined vs Unrefined", refining adds about $10-20 of value per barrel [1]. At Iran's volume, that is billions of dollars, but not a 5x in revenue. [1] https://www.canadianfuels.ca/website/media/PDF/Publications/Economics-fundamentals-of-Refining-December-2013-Final-English.pdf https://www.canadianfuels.ca/website/media/PDF/Publications/...
    - rckoepke 6y ago
      I was referring to my statement earlier in this thread: > And they could be using 1960's technology to refine their oil into higher value products but they simply aren't, for reasons I don't understand. "Refine" was used loosely, but the bulk of the plastics market are still relatively simple products that don't necessarily require extremely high technology to produce. It's still a cutthroat commodities business, but producing a little plastic has the potential to add a lot of dollars. You can see this happen in Saudi Arabia over the past decade. They worked with Dow Chemical to produce the "Sadara" plant - a very large refinery and chemical plant. Crude oil made up over 80% of Saudi's exports from 2010-2014. The first phase of Sadara began selling product in 2015, and the final major piece (of 26) was commissioned in 2017. When Sadara opened its first phase, crude oil dropped from ~80% of export dollars in 2014 to just 55% in 2015. So yeah, opening a chemical plant can massively change your export profile. Now, this data includes a huge drop in oil price after 2014 so it's not entirely fair. But is is reasonably fair vecause it wasn't just oil prices that dropped - chemicals+plastics dropped up to 50% as well. Their $ value in exports stayed constant despite the price drop, indicating a large surge in export volume. And this is largely driven by the construction of a single integrated refining facility.
sumedh 6y ago
Indian refineries used to import Iranian crude and then sell some of processed oil back to Iran but those refineries have significantly scaled back their imports because of US sanctions.

ramchip 6y ago

More recent chart (2017 rather than 2012) - this one reports 72%: https://commons.wikimedia.org/wiki/File:Islamic_Republic_of_Iran_Exports_Treemap_2017.svg https://commons.wikimedia.org/wiki/File:Islamic_Republic_of_... Source: https://oec.world/en/visualize/tree_map/hs92/export/irn/all/show/2017/ https://oec.world/en/visualize/tree_map/hs92/export/irn/all/...

fyfy18 6y ago

Why can't they just take loans like most Western countries do to balance their budget? The UK has been running at a deficit (£55 billion in the last budget) since 2002. Based on my back of the napkin math, the UK would need to export it's oil (yes, the UK is a net exporter of oil) at $350/barrel to cover that.

mdemare 6y ago
There are only a handful of countries that can borrow in their own currency, and borrowing in another currency is very risky.
rckoepke 6y ago
> Based on my back of the napkin math, the UK would need to export it's oil (yes, the UK is a net exporter of oil) at $350/barrel to cover that. In a vacuum this isn't really a good-faith argument. It can be used to illustrate limited concepts, as another user did in this thread, but it's not really a valid point in general for anything. That's because the question of "what price of oil does [country] need?" only makes sense for countries where the supermajority of their GDP is based on resource extraction. UK to Iran is not a great comparison because only 4.5% of UK's exports are crude oil. https://oec.world/en/profile/country/gbr/ https://oec.world/en/profile/country/gbr/ Second, trade only makes up 30% of the UK's GDP, meaning it can and does better leverage its domestic production to meet domestic needs. Lastly, the UK has not been nearly as dependent on exports to balance foreign reserves as Iran is. Due to its uncommon status as a global financial hub, I think it has other ways to ensure it can continue to finance trade.
quintushoratius 6y ago
> Why can't they just take loans like most Western countries do to balance their budget? Who, exactly, is going to loan them money? If Iran were a person they'd have a sub-600 credit score while seeking a no-documentation car loan. Nobody in their right mind is going to loan them money for non-predatory rates. When we talk about a country taking out loans, we're frequently talking about bonds and, if you're not the US, actually talking to banks via the IMF. Are you going to buy Iranian bonds? Consider the following: - Which asset(s) do you think Iran will use to pay you back? Keep in mind that their largest asset - oil - has a rocky track record. - Loans are more likely to be paid back by a stable government. How stable do you expect Iran to be over the next 10-30 years? How likely is another Arab Spring? - Taking the above into account, what kind of interest rate would be adequate? Is it higher than the Iranians are likely to pay? How much higher is it than they can afford right now?

taneq 6y ago

Ah, so it's the ol' "Our unit price is our running costs divided by our unit sales" trick. Fine in a seller's market but guaranteed to fail in the face of competition.