The Cable

U.S. Frackers, Iran's Oil Men Threaten Energy Cartel

Iran's potential rehabilitation comes at an awkward time for OPEC, the elite club of petroleum-producing states that controls the flow of oil to the world market. The cartel's dominance is already threatened by a boom in oil extracted from shale in the United States, and now the potential return of millions of barrels of Iranian oil to the market looms over Saudi Arabia and other OPEC countries as they meet in Vienna this week.

While the global power shift brought on by the U.S. shale boom threatens OPEC from the outside, member countries are threatening it from the inside. Iraq, and now Iran, both want to increase production at a time when global supply is already high, raising the specter that OPEC won't be able to marshal its members into line to control prices. The end result could be lower oil prices next year, according to many analysts.

"OPEC's relevance is waning in our view," said Eric Lee, an oil analyst with Citigroup. Lee said the increased supply from non-OPEC countries has created a disruptive shift in the oil markets that reduces the cartel's control of the market.

That includes the United States, where a boom in oil and gas extracted from shale rock has changed the dynamics of the international energy market. The innovations in extraction methods that led to the boom, including horizontal drilling and hydraulic fracturing, are still under scrutiny for their effects on the environment, while U.S. domestic production continues to grow. The United States produced more crude oil than it imported in November for the first time since 1995. The shift means the United States is less reliant on oil from the Middle East, which could have wide-ranging effects on global politics and markets.  

This week in Vienna, Iran is laying the groundwork for a potential increase in oil production, pushing other countries to make room for Iranian oil to come back to the market in the event that a long-term deal to lift U.S. sanctions can be negotiated.

"Other OPEC countries would have to cut to make room for Iran," said Trevor Houser, partner at Rhodium Group, an economic research firm.

But it's unclear whether other countries will want to reduce production in order to make way for Iran.

"This could be a difficult moment for OPEC, a difficult year," said Patrick Clawson, director of research at the Washington Institute for Near East Policy. "Iran is going to be very resentful of anyone saying they should hold back their increase," Clawson said.

That's the way a cartel works. When global oil production is up, the cartel imposes quotas so that an increase in supply doesn't cause the price of oil to drop. The 12 OPEC countries get together and decide to hold back some oil from the market. Each country takes the short-term setback in order to keep the price of oil up, which ultimately benefits all the countries in the club.

Though OPEC is not expected to change its policy this week in Vienna, the prospect of more Iranian oil coming into the market could mean that the cartel might have to move sooner than expected to lower quotas.

"There are two problems: Can you get agreement to reduce the quotas, and can you get countries to abide by the reduced quotas," said Houser. "I think both are going to be pretty challenging."

The struggle will be keeping everybody in line.

"The history of OPEC has been frustrated by sometimes formal agreements that never materialize in practice; many countries accept reducing their own production, but then continue to sell oil under the table," said Leonardo Maugeri, an associate of the Harvard Kennedy School and former executive of Italian oil company Eni. Maugeri said that he expects OPEC to meet again in early 2014 to settle on a new policy. If it can't, oil prices could collapse.

While some analysts have heralded the end of OPEC, others have warned that it could lead to greater volatility.

"Volatile oil prices are especially damaging because people have less ability to make decisions about what kind of car to buy and where to live based on how much oil will take up in their budget," said Jason Bordoff, director of Columbia University's Center on Global Energy Policy and a former senior advisor in the Obama administration.

OPEC helps dampen volatility. In addition to intervening when oil prices are falling, it also ramps up production when supply is suddenly cut, in an effort to keep prices from spiking.

"Over the last couple years the Gulf states have increased their production when there have been disruptions in, say, Libya," Richard Mallinson, a geopolitical analyst with energy markets consultancy Energy Aspects, said. Mallinson said OPEC has weathered many challenges and will likely survive this one as well.

And while Iran is warning OPEC countries this week that they may have to make room for Iranian oil, some experts think that is still wishful thinking on Iran's part.

"The Iranians have an interest in actually creating this kind of perception, and that is to lure oil companies, the big international companies, to see the potential in coming back to the Iranian market," said Ali Vaez, senior Iran analyst for International Crisis Group. Since Iran doesn't have lobbyists in Washington, Vaez added, Tehran is hoping to convince international oil companies to argue that sanctions should be rolled back.

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The Cable

How Congress Could Steamroll Iran Sanctions Past Obama

Despite repeated objections from the White House, Senate Democrats and Republicans are charging ahead with plans to pass new sanctions legislation against Iran.

Though some Democrats fear burning bridges with the White House, aides tell The Cable that negotiations between senators in both parties are closing in on legislation that would impose new sanctions on Tehran after six months -- the length of the preliminary nuclear deal recently hammered out in Geneva. The bill would include an option to delay the punitive action if U.S. talks on a final deal appear promising. Despite earlier reports that Republican hawks would dismiss such legislation as overly lenient, a Senate aide says that's not the case.

Like perhaps no other foreign policy issue, Iran sanctions have pitted President Obama against a sizeable portion of his own party. In the last week, powerful Democrats such as Sens. Robert Menendez of New Jersey and Chuck Schumer of New York have openly defied the White House and advocated for new sanctions legislation.

On Friday, the administration attempted to demonstrate support for its Geneva deal by circulating a handout of lawmakers saying positive things about the agreement. But out of 535 members of the House and Senate, the White House only collected statements from 17 lawmakers -- in a list that counted mildly supportive tweets as endorsements.

In the latest sign of Democrats' open willingness to cross the administration, Menendez accused the White House of "fear-mongering" in its claims that new sanctions legislation would kill the nuclear deal and lead to war with Iran.

"As one of the architects of the sanctions regime we've had on Iran, this is exactly the process that has brought Iran to the negotiating table," Menendez told Face the Nation on Sunday. "While we have heard naysayers in the past say, no, we shouldn't pursue those sanctions, it seems to me that prospectively looking for sanctions that are invoked six months from the date of enactment ... sends a message to Iran, as it has throughout this process, that there is a consequence if you don't strike a successful deal."

Sources say a version of that proposal is currently being hammered out between Democrats and Republicans despite White House opposition. The law would work like this: If after six months, when the current interim deal with Iran is set to expire, no deal is made, then new sanctions against Tehran will take effect. However, if at that juncture, the White House needs more time to finish negotiating a final comprehensive deal, the bill gives the administration more flexibility.

How much flexibility is precisely what Democrats and Republicans are trying to work out. "The assumption that hawks would oppose this is only true if this latitude to delay for further talks is indefinite," a Senate aide tells The Cable. "If it's like 30 days because they think a deal is imminent, not sure hawks would object to that as long as [the administration] doesn't get endless 30-day renewals for talks to drag on forever."

The big unknown in these negotiations is Senate Majority Harry Reid, who is now caught between his Democratic Caucus and President Obama.

After a new sanctions bill passed by a landslide in the House, a bipartisan group of 76 senators including Kirsten Gillibrand (D-NY), Barbara Mikulski (D-MD), Ted Cruz (R-TX) and Kelly Ayotte (R-NH) penned a letter advocating for a tougher stance against Iran. Importantly, the call for a harder line came after the charm offensive by the newly-elected Iranian President Hassan Rouhani.

Where Reid stands is unclear. Prior to the Nov. 23 deal with Iran, Reid said the Senate "must be prepared" to add new sanctions in December. In a more recent appearance on the Diane Rehm Show he said members would need to talk it over. "If we need more work on this, we need to do stronger sanctions, I'm sure we will do that," he said. "So I look forward to input from both the majority and the minority."

Meanwhile, he continues to face bipartisan pressure in Congress's march to add sanctions. "It will be up to Senator Reid to decide whether we have that opportunity on the floor over the next two or three weeks or whether he's going to continue to block for the administration so that that doesn't occur," Sen. Bob Corker (R-Tenn) told Face the Nation. " I know Senator Menendez and I both will be working to try to figure out some way of ensuring that we get to the appropriate end game."

When asked if it it would veto legislation on new sanctions, administration officials have declined to comment.

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