What does the spread of street protests across Iran mean for the oil market? The immediate response, driven no doubt by the substantial amounts of speculative money that are in play, is likely to be an upward spike. But although the troubles are serious and fuelled by real hardship in a struggling economy, there is no objective justification for any increase. If anything, the demonstrations can be seen as the prelude to a fall in prices.
The first point in support of this argument is that the protests are based in the country’s cities and towns and not, so far, in the oil-producing regions. The disturbances in the southern port of Bandar Abbas are serious but there has been no report of any trouble near the Abadan refinery. Stories of an attack on pipelines in the south by Sunni Islamist jihadis have not been confirmed. As yet, there is no immediate reason to think oil production will be interrupted.
The second point is that the overriding drive of every Iranian government over the last 38 years since the 1979 revolution has been to stay in power and preserve the Islamic Republic, even if that involves making sudden and radical changes in policy. And in this they have been remarkably successful and remarkably pragmatic. As any visitor to Tehran will notice Iranian society, below a thin theocratic layer, is open and, within limits, tolerant of different views. The country has a partial democracy in which real votes are cast.
This means that whatever the rhetoric about using an “iron fist” to stop the protests the more likely response will be to try to buy off the protesters with increased public spending and subsidies for basic needs such as food and fuel. The obvious way to fund such spending would be to increase oil exports. With prices relatively high that is a temptation for many oil producers; for Iran it could be an imperative. It would not be surprising to see the country abandon its Opec quota.
Increased Iranian output and exports would come at a time when other factors in the market suggest a new year surge in production. The North Sea should very soon be fully back on stream after the Forties pipeline problems, and Libyan production should also be restored after the December pipeline fire. On these fundamentals it is hard to see prices being higher at the end of January than they are now.
Those are all temporary factors but there is a longer-term issue. The weakness of the Iranian economy cannot be corrected by a few handouts and subsidies. There are serious problems of unemployment and falling living standards.
Two years ago the Iranian government came to the decision, with some reluctance, that it had to accept constraints on its nuclear programme in order to remove the sanctions that have damaged economic development. This was another example of pragmatism in action.
The problem is that the sanctions have only partially been lifted. Most international companies, including those in the energy business, have stayed away for fear of US action against them if they do business with Tehran. That leaves the country short of investment, technology and buyers for many of its products.
The current protests could lead to a fresh outbreak of pragmatism in Tehran. A new deal, on both the development of nuclear weapons and the withdrawal of support for militant groups across the region from Yemen to Lebanon, is not impossible. A significant relaxation in sanctions would help the Iranian economy and would suit many would-be investors — including, of course, the international oil industry.
There is a vast amount of money waiting for access to one of the last great prizes for the oil industry — huge undeveloped resources with a low cost base. President Donald Trump would no doubt claim that his pressure had forced Tehran to accept a tough deal. Crucially, though, the Islamic revolution would survive and Iran’s current government would remain in power.
Nothing is certain. Hardline ideology could prevail and force the government into a long, miserable confrontation with the people. The Saudis — who would prefer the Islamic Republic as a pariah state rather than see it returning to respectability and a role as the region’s dominant state — could well try to block any agreement.
Whatever the outcome, there is a sense of instability and unfinished business across the Middle East; 2018 is not going to be a dull year.