Spread Of Unrest To Iran’s Oil Industry A Milestone

Reports that oil workers in Iran are going on strike in opposition to the government and its crackdown on protesters could represent a major change in the country’s political situation—and possibly affect the oil market. Shades of 1979!

Needless to say, analyzing or predicting Iranian politics from this distance (and as a non-expert) is challenging, as wishful thinking and selection bias on social media makes it hard to know just how successful the protesters might be. People in the West have been repeatedly optimistic about anti-government protests, only to be disappointed as the government cracks down, sometimes violently, and restores order. One lesson is that the opposition tends to be made up of middle-class and urban elites, who are less prone to violence than the government and its various militias.

ADVERTISEMENT

But I am reminded of the situation in 1978, when a group of bankers went to Tehran to arrange a loan for the then-ruling Shah. When asked about ongoing protests, they shrugged them off, arguing that they were common and the Shah had always survived them before. That was true but serves as an example of the cliché ‘nothing changes until it does.’

It is now reported that oil workers at two refineries and a petrochemical plant have gone on strike in sympathy with the protesters, which could indicate that the opposition is much broader than in the past. Oil workers are government employees and should be more supportive of it and their defection says much about the depth of the unhappiness with the government, its many rules, and the corruption which has absorbed much of the oil revenue and stymied the private sector.

On the one hand, Iranian oil workers’ strike was a major element in the overthrow of the Shah, in part because fear of a cessation of Iranian oil production and exports encouraged the U.S. and its allies to withdraw support from the Shah, leading him to depart the country. On the other hand, there is no government that could effectively pressure Iranian President Ebrahim Raisi, let alone the Ayatollah Khamenei, to resign should oil exports be cut off. Although China is thought to be the major buyer of Iranian crude, most appears to be lifted by smaller refiners with minimal political clout and any Chinese political position seems unlikely to influence either the government or the opposition.

ADVERTISEMENT

Restrictions to refinery activity will create shortages of fuel, which will undoubtedly further enrage the public, making this a contest between the power of the barrel of a gun and the power of a barrel of gasoline. Of course, should the government import gasoline in response to the strike, the global market will get that much tighter, although purchase quantities should be small.

The loss of Iranian crude to the market from a spreading oil workers’ strike would be relatively minor, especially if the Saudis and others choose to offset it. Given long-standing political tensions between Iran and the Saudis (indeed, with most of her neighbors), it is likely that most would not seek to help the government but undermine it. This would presumably mean calming global oil markets with additional supply to discourage Iran’s customers from possibly aiding the government.

Ultimately, the resolution of the conflict will rest with the people and government of Iran and will probably mean small losses of crude oil and petroleum products to the world market, amounts which could be easily offset by other producers with an assist from SPR withdrawals. Needless to say, the market impact will be bullish for prices, something unwelcome in the U.S. and oil importing nations, which could last for months.

ADVERTISEMENT

But two possible political paths could put downward pressure on prices, albeit not immediately. The government could decide to quickly agree to a renewal of the JCPOA nuclear agreement, which would allow it to raise exports and gain revenue with which to appease protesters. This probably wouldn’t work, as complaints go far behind the economy and even if it were done, the impact would be delayed. Promises of better times through higher oil revenues—in the future—would not change the situation in the streets.

Alternatively, the government could fall and a new government not only renew the JCPOA agreement but take other steps to rejoin the international community, which would mean much less regional tension. A new, less xenophobic government should find it much easier to attract foreign investment and alleviate fears of oil market tightness in the medium term of 3-5 years out. And while markets ofte react to expectations ahead of events, the likely impact on the near-term oil price should be minor.

However, it is also possible that the government will again prevail and, feeling strengthened, take a harder line at the JCPOA negotiations, delaying an end to sanctions yet again. And even if there is a new government, there could be ample delays in restoring oil production and exports as factions fight over legislation and especially revenues. Some increase can be expected without foreign investment, and would be welcome, but there are a lot of obstacles to returning Iran to a major world oil supplier, regardless of the government in power.

ADVERTISEMENT