IRAN, OIL PRICES, AND THE GLOBAL ECONOMY

MONDAY, MAY 7, 2012 WASHINGTON, D.C.

MODERATOR: Uri Dadush

Senior Associate, International Economics Program Carnegie Endowment for International Peace

SPEAKERS:

Jörg Decressin Deputy Director, Research Department

International Monetary Fund

Karim Sadjadpour Senior Associate, Middle East Program

Carnegie Endowment for International Peace

Jamie Webster Senior Manager

PFC Energy

Transcript by Federal News Service

Washington, D.C.

URI DADUSH: Good morning, ladies and gentlemen. And thank you very much for coming today to this event at the Carnegie Endowment on “Iran, Oil Prices and the Global Economy,” part of our attempt here at Carnegie to connect the dots between the big political developments and the – and the international economy.

We have to discuss this issue Karim Sadjadpour, who I’m sure you know is with us

here at Carnegie and one of the leading authorities on what’s happening on Iran. We also have Jamie Webster, who comes back to us, senior manager, Petroleum – PFC energy, to talk about what’s happening in the oil markets and the implications of some of these developments in Iran on oil prices – the prospects for oil prices.

And last but not least, to my left is our good friend Jörg Decressin, who also comes

back to Carnegie. He is deputy director at the IMF Research Department, and he is the person who is directly leading the preparation of the World Economic Outlook. So between these three gentlemen, I think we are very well-served, very well-positioned to discuss this complex connection of issues.

[00:11:40] Let me begin, then, by asking each of our panelists to give us their take on their

particular – on their particular angle at this. So Karim on Iran, Jamie on the oil markets, and Jörg on the global economy. We’ll start with that. Then we’ll have a conversation among the panel. Then we’ll open it up to questions and answers.

So Karim, you want to kick us off? KARIM SADJADPOUR: Sure. Thank you, Uri. Thank you all for coming. And

I’m going to be very brief, because I look forward to hearing from Jamie and Jörg as well. And I’ll be brief about what I see as the domestic calculations within Tehran right now, both with regards to the nuclear issue, the nuclear negotiations, and as it relates to the price of oil.

Historically, we can always say that the Iranian regime, the Iranian supreme leader,

has long been averse to compromise while being pressured. His philosophy is that when you compromise under pressure, that doesn’t alleviate the pressure. That shows weakness and invites even more pressure. But the context has somewhat changed. And the Iranian regime is now subject to unprecedented international political and economic coercion in the form of the central bank sanctions, the central – the U.S. Congress sanctions against Iran’s Central Bank and the looming EU oil embargo, which is scheduled to be enacted I think sometime in late July.

[00:13:17] So the context has somewhat changed. Jamie’s going to describe where Iran’s oil

production is at, but it’s kind of reached historic lows since the 1979 Revolution. And what

we’ve noticed in the last month or so since the nuclear negotiations in Istanbul is that whereas in the past Iran has commonly approached nuclear discussions or any conversation about the nuclear issue by showing defiance and intransigence, their diplomatic body language has started to change a little bit. Their rhetoric has started to change a little more; it’s no longer showing signs of utter defiance and intransigence. They’re beginning to show signs of conciliation.

I think it’s far too early to predict that they’re going to go to the next round of

negotiations, which are slated to take place May 23rd, I believe, in Baghdad, ready to make a deal. But I think one thing that they have learned is that simply kind of being utterly defiant and intransigent has united the world against them in a way which they didn’t anticipate. So certainly, their diplomatic body language, as I mentioned, has changed.

[00:14:42] I think that one factor which is likely going to inhibit the probability of some type of

a deal is the U.S. presidential election, I would argue. I think in an election year, it’s going to be more difficult for the Obama administration to offer Iran the types of concessions it might need to justify a deal domestically. I think that’s going to be one factor.

And second, I think the EU oil embargo likewise – it’s unclear – I think it’s certainly

been certainly Iran’s goal to get a postponement of that oil embargo. But it’s unclear whether Iran is able to do or ready to do what it would take in exchange to get that embargo. And we can talk about that – what that is. But I think the broad contours of that deal are probably well-known to you, which is, you know, capping enrichment at 5 percent, agreeing to some type of intrusive inspections regime and sending out a sizable portion of its – of its low-enriched uranium.

A couple factors I think which are worth mentioning – when I think Uri first – and I

– when Uri and I first had the conversation about this panel, the threat or the concerns of an Israeli military strike on Iran were quite high. In the last several weeks, given that several of Israel’s top kind of intelligence and military folks have come out very much in opposition to an Israeli strike on Iran, I will say that likelihood has diminished significantly. It’s not the threat it was once perceived as several weeks back.

I think that’s going to have mixed results. On one hand, I think oil prices – the oil

markets have somewhat reacted to that, and the risk premium has come down. On the other hand, the threat or the concerns of an Israeli military strike were one factor – not the factor, but one factor in keeping Russia and China and the EU and the U.S. all on the same page with regards to sanctions. And you may see that now that the threat of an Israeli military strike has somewhat diminished, that the sense of urgency that the Russians and the Chinese have at remaining on the same page with the U.S. and EU may have decreased somewhat.

[00:17:18] The French elections are also worth mentioning. In the past, it’s been interesting

that the French government has been to the right of the Obama administration with regards

to Iran policy and with regards to the issue of nuclear proliferation. Many people have been anticipating that now with a change of government in France you will see a somewhat more conciliatory approach or a softer approach out of the French.

This morning, Francois Hollande released a statement; I’ll quote him. He said, “I’ve

not criticized the firm stance of Nicolas Sarkozy resulting – regarding the risks of nuclear proliferation. I will confirm it with the same force and the same will. And I will not accept that Iran, which is perfectly entitled to access civilian nuclear energy, could use this technology for military purposes.” So you know, the signs – it’s still premature to say, but I wouldn’t predict that you will see a significant difference now in French policy.

[00:18:17] And I will just end on saying this; and Jamie and Jörg can speak to this more than I

can. But over the last decade when we talk about oil prices, Saudi Arabia has frequently said – and I can remember this, you know, since 2003 – Saudi Arabia saying, well, our sweet spot for the price of oil is $55 a barrel. And then over time they would say, well, our sweet spot – we would like to have it around $70 a barrel. (Laughter.) And then, you know, a couple years later – our sweet spot is around $90 a barrel. And the last time I spoke to Saudi official, last week or so, he said around $100 a barrel now is our sweet spot. So as oil prices keep going up, the comfort level of countries like Saudi Arabia and other Gulf countries also go up.

And there’s also an interesting phenomenon in the U.S., with the advent and the

development of shale oil and shale gas, that – you know, those types of industries, shale oil and shale gas, are only economical when oil is also at a certain number. So there seems to be kind of an inadvertent broad collusion among several forces who have competing interests to keep oil prices somewhat high. So it’s not just Iran that would like to see very high oil prices. I think there’s other countries as well. But I’ll end my comments there and look forward to your questions.

MR. DADUSH: Thank you very much. So Saudi Arabia has a sweet tooth –

(inaudible, laughter). The – let me ask Jamie to pick it up there. JAMIE WEBSTER: Sure. I would – actually, I would – I would add, Karim, that I

think Saudi’s real sweet spot is about $1 less than whatever the global economy can handle. MR. SADJAPOUR: Yeah, exactly, so – (laughter) – MR. WEBSTER: At the end of the day, everybody always likes to get as much as

money as they – MR. SADJAPOUR: Yeah, exactly. MR. WEBSTER: – as they can without killing off a golden goose.

[00:20:07] 2011 was – had two kind of big shocks within oil markets. One was the Arab

Spring, which took off substantial production, or essentially all production off of Libya. And then from the demand side, there was a demand shock after Japan suffered from its earthquakes and suddenly had to increase its use of crude and diesel for power generation.

As 2011 ended and as Libya started to come back and bring its production back, the

– suddenly, 2012 was really turning into the year about Iran. And so while you would have expected that Saudi Arabia could have brought its production down as Libya brought its production back up; instead, it’s had to keep its production up quite a bit.

Despite this, you’ve seen the price at least until recently steadily rise in the last several

months. And we would argue that the real root cause of all of this is really the hard going after of Iran on a number of – from a number of different countries regarding sanctions and the concerns about a lot of – by a lot of particularly Asian buyers about the risks of war, inadvertent or otherwise, within the Gulf, which has caused substantial stock building within India, China and other Asian nations.

[00:21:28] Right now we are actually producing about 2.8 million barrels on – of oil more than

we did last year – this is globally – but our demand is only up around a million barrels of oil. So what we’re essentially saying is you’re producing about 1.8 million barrels of oil more than you actually need. This is our estimates for the year. So this would normally indicate that there is just far too much production, and you should actually have a substantial price decline; that it is essentially – there is just far too much oil that is – that is chasing after too few demand places.

Instead, because of the concerns and the risks about something going on in Iran as

well as suddenly the Iranian production being shut off after July 1 – and it’s already started to bring down its production – as well as concerns about and risks about production out of Sudan, out of Syria, out of Yemen; instead, this otherwise bearish sort of market has actually been seen as a – as a time for – you know, to grab the oil while you can because who knows if it’s going to be here in the second half of the year.

[00:22:40] This has really kind of created an environment where you’ve got so much oil floating

around – and you see it even in the – in the stock numbers that are released by the EIA every week, particularly last week when you saw substantial crude builds within the United States. You’ve really started to move to a point where suddenly, the oil prices is at a point where it’s just – there really is too much in it, too much supply in the markets.

That, combined with what appears to be – and when I’m speaking about political

comments, I often am putting it in the guise of what my – what my clients, which are often oil traders, say; which don’t necessarily mean that I agree with them, but these are how they – how they – how they view the world – is that with a less of a chance of either an attack

with Iran or even the potential for some sort of breakthrough, where suddenly there is – well, we estimate, 700(,000) to 800,000 barrels a day of Iranian exports suddenly not having to find another home, you’ve got suddenly a much looser sort of environment. That, combined with some economic indicators that are not as rosy as some were hoping, is really what kind of precipitated this oil price decline that you saw on Friday, and you saw a little bit more this morning. Right now, Brent – at least as I left my office around 1:12, 1:13, down $8 or so from last week. And WTI – that is, you know, kind of U.S.-based internal midcontinent prices, around $97 a barrel.

But we don’t think that there is a potential, even if there is suddenly an

announcement, say, at the Baghdad meeting later on this month, or some other – or at the IAEA discussions later on before that meeting – if there is suddenly a big announcement that Iran has suddenly seen the error of its ways and Khamenei has suddenly decided that he wants to play nice and we’ll do whatever he – whatever everyone wants. Even if you suddenly saw that happen and there was a sudden price correction down, there was still quite a bit that is leading – that is going to help push that price up and keep it up, elevate it around the hundred-dollar mark.

And there is (sic) two things. And one Karim has already mentioned to you, which is

that sweet spot, which is not really so much a sweet spot anymore as this is the money that we need to get in order to continue to provide our economies with the sort of growth that they need. Recall that a lot of these oil-exporting nations are still extremely nervous about the – about the implications of the Arab Spring. And concerns and risks about it occurring in their own country has caused them to increase their own spending internally. That, of course, raises the amount of money that they need for their own – for their own oil exports.

[00:25:33] The other part is because the Asian buyers are still very skittish and the need to build

up their stocks eventually – did I lose – suddenly lose my – OK. MR. DADUSH (?): No, you’re good. MR. WEBSTER: They will see any sort of significant price decline as a real buying

opportunity. So you’ve got those two factors. Additionally, Saudi Arabia right now is producing around 10 million barrels a day.

And it would – to keep along and keep up with its OPEC brothers, it would not be averse to bringing that back relatively quickly, especially as we’re getting ready for the next OPEC meeting in June.

[00:26:10] So essentially, what we’ve seen is we’ve seen this price increase because of the

sanctions and because of the risks of war and the risks of losing supply, we’ve started to see a decline because there is so much oil that is floating out on the market and because you’ve seen some weaker economic indicators. But we don’t see a real potential for you to suddenly

get back to prices you saw, you know, after the 2008 crisis where you saw a substantial amount of time where you were below, you know, $80 or so.

MR. DADUSH: OK, well, thank you very much, Jamie. So that sounds pretty reassuring, Jörg. What do you – what’s your sense of global

economy and how vulnerable it is? JÖRG DECRESSIN: I mean, first, much of what Jamie said, we agree with. There

has been an increase in production. For example, Saudi Arabia is presently producing at a level that’s a 30-year high, so it’s not that they’re only taking the big prices; they’re actually responding with their output. And undoubtedly, if there was a reduction and demand for oil, they would probably also scale back somewhat the production.

But the key factor that is going to keep prices high going forward is the strong

growth that you’re seeing in the emerging economies. If you simply do a PPP aggregation of advanced and emerging economies, you will actually see that this recovery is stronger than previous recoveries. But for us, it doesn’t feel at all that way because we’re living in the advanced economy space where growth is very weak. But in the emerging economies, growth is strong, and that’s also where growth is energy-intensive. And that is going to keep prices high going forward.

Now, rather than commenting on the very short-term implications, which we will

certainly do in the context of our conversation here, I thought I would take a step back and ask the following question. If in the 1990s you would have been told that the average oil prices could be at $100 per barrel in the year 2010, and you could have been told, like, look, we could also have a financial crisis, right – I mean, you probably would have said that either one of these will do severe harm to the global economy. And yet, we are here – we were in 2008 at an average price of oil of around $100 per barrel, which is where we are now.

And yet, during the period of the 2000s, the global economy did just fine, you know.

It did quite well, and it wasn’t only because of credit-driven growth. We had a large part of the world that was actually performing extraordinarily well in the emerging economies, but there was also solid growth here that, in the end, was not bubble-driven growth. So the question is, well, how did we make it to $100 per barrel and are still, in many ways, broadly fine?

[00:28:52] And there are essentially – and I’ll use five reasons. First, if you go back to the

1980s, since then, the oil intensity of production in advanced economies but also in key emerging economies has declined a lot. So if you look at our oil intensity of production in the advanced economies, it’s about half of that – of what it was in the 1980s. If you look at the emerging – (inaudible) – it’s two-third of what it was in the 1980s. So the oil intensity of production has come down, and this is a process that will continue. So that’s reason number one.

Reason number two is that, of course, the oil price increase itself was largely driven by strong demand from emerging economies – a fundamentally sound global economy – rather than by cutbacks in supply. So that helped.

Reason number three, and I think we never appreciated this enough, is the recycling

of petrodollars. The reason we are often concerned about high oil prices is that it shifts purchasing power from many that are importing oil to a few that are exporting oil. And those few tend to save the oil, but – save the revenues, the proceeds. But in the process of saving, they’re recycling it to all national markets, and therefore support low interest rates, more investment and so forth. So this is the third reason while oil may not have done as much damage.

[00:30:11] The fourth one is that our labor markets are fundamentally improved in terms of the

way they operate relative to the 1980s. You look at Europe; you don’t see any more unions pushing for wage hikes in response to higher oil prices. People understand that if oil prices go up, this means we have to accept the cut in purchasing power – otherwise, we are going to harm output and employment.

A fifth reason is the central banks, which have contributed to improving the

functioning of labor markets at the price of very high unemployment back in the Volcker days and which had built up a lot of credibility. And this enables them, when oil prices go up, to keep interest rates nonetheless low and therefore avoid that there is this big impact of oil price increases which we’ve had in the ’70s and in the 1980s. And this improved operation of central banks is not only a story of advanced economies. Even if you look at those that are targeting inflation in emerging economies, they’re able to operate in a similar manner and thereby shelter their economies from the fall of oil prices.

So these are five reasons for why this large increase in oil prices has not had such an

overwhelming effect on global output as we might have expected. That should also give us some assurances about further increases in oil prices in the future for as long as these happen steadily and gradually.

[00:31:32] Now, why should we still be worried about oil, and why are we sitting here and

therefore talking about it? Let me give you four reasons for that, and then we can go into the details.

The first is oil supply has generally been stubborn to respond to high oil prices.

We’ve had, like, 20 years – and maybe Jamie can correct me or add, expand on that later – where investment has been fairly limited in oil production. The cost of extracting oil has increasingly risen because of technological challenges – you’re going into the deep seas and so forth – because of environmental challenges when you’re developing oil sands in Canada. And finally, also, there are still some regulatory impediments to developing oil. So the bottom line is we are on a part of the supply (curve ?), as we nerd-economists say, which is,

you know, consistent with a higher price, and we will remain there. So we should be worried.

And it’s a supply that always responds only slowly. And because it responds slowly,

yet demand can go up and down fairly quickly, you can have large swings in oil prices, right? And this is what we’ve experienced over the last couple of years. And the economy generally doesn’t like large sudden swings in oil prices. It copes with those much less well than with steady oil price changes. And this is a particular concern now because inventories are pretty low and spare capacity is also pretty low in the oil market.

[00:32:56] Now, another reason why we don’t like these large swings is they have

redistributional consequences, right? I mean, oil is a heavy expense for the poorer people, lesser for the richer people. And so whenever oil prices go up, it is the poor that suffer most – poor oil importing countries or the poorer segments in the populations in the advanced economies.

MR. DADUSH: Unless you have a private plane, I understand. MR. DECRESSIN: I guess so. (Chuckles.) MR. DADUSH: OK. Sorry. MR. DECRESSIN: So the – for the poorer – for the poorer, it is a challenge. And

of course, it takes – it takes time for government to respond to this challenge. This is not something you can just engineer overnight. And so this is a problem.

[00:33:33] I would add that in the current context, it’s a particular problem because all our

advanced economies are fairly weak. The recoveries are fairly weak. We are struggling with strengthening the financial system, with rebuilding public finances, and therefore high oil prices are perhaps a particular concern right now at this juncture.

But with this, I pass it back to you, Uri, and I’m happy to field questions on specifics

and so forth. MR. DADUSH: Great. That was terrific, and I found the explanation of why oil

prices are somewhat perhaps less of a concern today. Your five reasons – very interesting, very compelling.

I was wondering whether Jamie had first any reactions to what Jörg said. It’s sort of

a fairly relaxing picture that he’s painting as well. MR. WEBSTER: My only – and I would completely agree with Jörg on the – on the

supply curb and how things are getting more and more expensive. If you go back and move away from what Saudi Arabia needs in terms of its oil revenue and just go into pretending

that it’s just a regular sort of company in terms of what it needs for, you know, say, a 10 (percent) or 12 percent return – you know, it costs them 3 (dollars) to $5 to pull oil of – out of the ground. But you do have, on the – on the more expensive part of the curve – which is, you know, Canadian oil sands – they need about $85 a barrel. And so – and that price is continuing to march up. So there is this continued upward pressure.

The one element of the five that I saw that I, at least from what I’ve seen – that there

has been a change in, and that is your recycling of the petrodollars. Previously, you are right, that the – as the – as the price will increase, and as the Saudis and the Qataris and the Kuwaitis would get additional oil revenues, they would spend that in Europe, they would spend it in the U.S., or they’d buy, you know, the whole Mayfair district in London.

[00:35:32] But things have changed quite a bit now. And so, you know, while we all remember

Dubai and how that was a bit of a – a bit overwrought, there – the reality is there is substantial investment throughout that region. And one of the issues that – one of the risks we’ve started to signal to our clients is this shift of the petrodollars from, you know, heading out, and actually being used internally within, you know, the oil-exporting countries. And I’m – when – in this – in this regard, I’m talking primarily about the Middle East. So that would be the only one that I can see, you know, as we’re talking about, as long as these five continue, it seems to me that that has been – that that has shifted in recent years.

MR. DADUSH: (Off mic.) MR. DECRESSIN: Can I say something (on that ?)? MR. DADUSH: Yeah. Yeah. MR. DECRESSIN: I think it’s a very good – it’s a very important point. At this

stage, this recycling, also if – let’s say it were to take place, let’s assume it were to take place, it wouldn’t make the difference that it usually makes. I mean, we already have low-interest rates. The problem is not that there is – there is –

[00:36:36] MR. DADUSH: A shortage of savings. MR. DECRESSIN: A shortage of savings , right? I mean, the issue is the banks

have very tight lending standards right now, for good and for bad reasons – for both, right? And so the low-interest rates are not really passing through to the economy. And so in that sense, yes, it’s not operating.

And it’s also true, I would fully agree, first, they’re spending more inside. That is not

bad, because it also results into more imports and therefore helps the rest of the world. But they’re also investing more in other regions of the world. That is certainly also an important development.

MR. DADUSH: Let me ask Karim here, is there some kind of nice self-correcting mechanism for Iran in this crisis that is, you know, the more the crisis escalates, the higher the oil price goes or stays high, and the easier it is to sort of manage the situation internally in Iran? And broadening that question out a little bit, what is the – what does the Iranian economy feel these days? How does it feel inside Iran economically?

[00:37:42] MR. SADJAPOUR: Sure. Let’s say a couple of things. One is – and Jamie can

speak about this more than I can, but even if oil prices go to $200 a barrel and Iran isn’t able to sell its oil, then it’s going to have some major difficulties. So at some point, I think that when faced with this escalating pressure, they’ll want to do something to show some signs of conciliation to alleviate that pressure.

If I had to – it’s never wise to make predictions about things, but if I had to kind of

anticipate how Iran is going to handle things in the coming months, I would say maybe similar to what Iran did in 2003 – when in 2003 it was a totally different context. If I’m not mistaken, oil prices were around 20 (dollars), $25 a barrel, the U.S. military had defeated an Iraqi army in about three weeks, which Iran wasn’t able to defeat in eight years, and the Iranian regime was extremely nervous – I was based in Tehran at that time. And what they agreed to do at that time was to suspend enrichment of uranium – I think they did it for a couple of years – until the context changed. What I mean by the context changing was that the U.S. found itself in a big mess in Iraq, Iran was increasingly on the rise and asserted power in Iraq, and oil prices started to spike significantly and Iran felt less compelled to maintain that suspension.

And I would say this time around, it’s not within the realm of possibilities, I would

argue, that they would agree to a suspension of enrichment of uranium, but I do think it’s a possibility that they would agree to some type of cap on enrichment at certain level in order to stave off this looming oil embargo, in order to stave off some of the pressure. And then when the context changes, as I’m sure it probably will, they will then feel emboldened to move forward. So that’s one front.

In terms of the domestic Iranian economy, you know, this is a national which has

been subject to sanctions for basically the last three decades. One of the points I always make to people is that Iran is different than Cuba or the Iranian population, the Iranian society is different than Cuba and that I think for many Cubans, they look at the U.S. embargo against Cuba as the primary source of Cuba’s economic malaise. And that’s kind of a major scapegoat for the Castro regime.

[00:40:24] In Iran, I would argue that’s not the case. This is purely anecdotal, but I think many

people who have spent significant time in Iran would agree that when you – when you go around and you ask Iranians about their lives, nine, if not 10, out of 10 people would say the biggest problem they have in their lives are economic concerns, whether that’s incredibly high inflation or underemployment, unemployment. And then when you ask the follow-up question, and you say, well, why is Iran’s economy so lousy: It’s very rare that people say,

well, it’s because of the economic sanctions, and if there were no sanctions, then the mullahs would be doing a very good job of running the country. It’s – overwhelmingly people say it’s because of mismanagement and corruption and these types of factors. So I think that the point is that on sanctions, yes, I think there has been a discernible deterioration of people’s quality of life. But it’s oftentimes difficult for people to discern what is as a result of sanctions and what is as a result of mismanagement.

[00:41:37] And the final point I would say on this is that I think oil prices, I would argue, are

going to be the single most important variable in determining the future of this Iranian regime. What the – Iran has done over the last couple years has been quite revolutionary in terms of their subsidy reform policy. So in the past, they would subsidize gasoline and basic foodstuffs and things like that to the tune of, I think, about $100 billion a year – very, very significant. So you know, there was a time in which a liter of bottled water was cheaper in Iran than a liter of gasoline.

And that’s changed. They basically removed most of the subsidies. And the logic of

removing the subsidies was on the part of the regime. They said, well, when we subsidize basic foodstuffs and gasoline, we’re helping all Iranians so the upper class benefit, the middle class benefit. And in reality, the regime recognizes that their constituents are kind of the lower-income classes, oftentimes in the provinces what – and oftentimes people describe as the pious poor. So why should we also subsidize the elite who don’t like us and we don’t like them?

So their philosophy was to remove the subsidies and offer people cash handouts and

– cash handouts to every individual. And this has created a very odd dynamic with the Iranian economy, because I think that a lot of the urban middle class living in places like Tehran are not getting those cash handouts and they’re suffering under very high rates of inflation. But if you’re a family of eight that lives in the provinces and inflation hasn’t been so dramatic, your standard of living is actually, in many cases, improved significantly, because you’re getting a handout for each member of your family.

[00:43:43] And so that’s created basically a dependency. What’s this old expression: that a

luxury once had becomes a necessity. And so once you’re giving these handouts to people, you can’t take it back from them. And these handouts – their ability – the government’s ability to continue to pay people directly is directly correlated with these high prices of oil. So I think that, you know, if there is going to be some type of political change in Iran, I think it would require some type of a significant contraction of oil prices, which both of you are anticipating is not a strong possibility.

MR. DADUSH: Can I – can I ask just how realistic are these oil sanctions? If Jamie

wants to pick that up or Karim. I mean, is it realistic that you can block sales of oil from Iran? Won’t there always be, you know, some smuggling and some – there’d be huge incentives –

MR. WEBSTER: Sure, sure. But it’s – MR. DADUSH: -- for people to buy it at a – at a lower price. MR. WEBSTER: But smuggling a VLCC with 2 million barrels of oil is a little bit

difficult than just, you know, putting it in your car and heading across the border and doing that. But you’re right, you know, the sanctions right now and the ones that everybody is focused on and should be focused on are essentially two-fold. One is the Kirk-Menendez amendment that was part of the National Defense Authorization Act and was put in. And it has a number of ways for the president to, you know, essentially give a pass for countries. But it essentially is pushing countries – and that the poster child for this that has complied with this is Japan – pushing countries to make strong efforts to reduce the amount of Iranian oil that they are receiving.

The other part of it is what the EU has done, which is essentially said come July 1,

you know, oil imports from Iran will stop. And while there has been some indications, at least from a market standpoint, of maybe a potential for that to be delayed slightly. You know, May 1, they were supposed to have a – I’m sorry – April – no, May – May they were supposed to have a report similar to what the U.S. is doing, which is a report saying, yes, we can or cannot handle this and we can find another – you know, other alternative supplies to the Iranian oil.

[00:46:09] So that’s supposed to go in in July 1. Now granted we’ve got these couple of

meetings that are coming up, so there is this potential that this could be pushed back. But you’re already seeing countries make moves, largely because of getting ready – refiner’s getting ready because of what’s going on in the EU, but also because of these U.S. sanctions, which is essentially a sanction that says, you know, if you continue to do this, we’ll – you know, we’ll sanction the central bank. It’s something that could be – it’s a very heavy hammer to use. And I personally don’t see it actually being wielded. I think it is more of a – something that’s kind of to strike a little bit of fear and for countries, you know, Japan, South Korea, India, China to try to continue with positive trade relations with the U.S. They will make those steps to reduce Iranian crude flow.

So Iran previously was exporting, you know, 2.2 million barrels a day. We expect by

July, assuming these all continue to go forward, about 700(000) to 800,000 barrels a day off-line. So Iran right now is in a point where it is trying to, one, find places that it can put this oil. And so you’ve seen its floating storage rise quite precipitously. For a while, it kind of shrunk down as it was making room, because the other aspect is these sanctions on insurance for the ships, but you’re also seeing them trying to find it and use it in places within the domestic economy. And this is actually where their subsidy reform is actually now backfiring on them, because now they would – they would actually love for everybody to start using this oil so they don’t have to shut down these fields. Shutting in these fields is – has negative implications longer term.

[00:47:55]

So this is 700(000) to 800,000 barrels a day. If you shut those off, you will need to make substantial investments, or when you bring them back on line, 10 (percent) to 40 percent of that oil will not come back on line. It’s not just, you know, at your tap – at the faucet where you just turn it off and turn it on. When you turn it back on, 10 (percent) to 40 percent of that oil will not be there again, and you’re going to have to build – essentially build new pipes, do some more drilling. And the NIAC, which is the national Iranian oil company, has been, you know, significantly underfunded for years. And so it will – there’s likely a long-term implication that this would see long-term exports decline out of Iran.

So you’ve got real pressure from the Iranians that they’re going to – they would love

to find some sort of deal or something to kind of, you know, push this off. And obviously from the U.S. side, if you can have some sort of temporary move that would bring oil prices down, obviously in this election environment the Obama administration, as we’re heading towards the driving season, it would pretty much wrap up the election for him, I think.

[00:48:58] MR. DADUSH: OK. Before I open it up to the audience, I want – I want to ask a

little bit about, you know, extreme scenarios. So what’s an extreme scenario? So one extreme scenario is the Iranians, confronted with these – with these oil sanctions that drastically cut their – (inaudible) – do some kind of desperate act – I mean, then they’re confronted either they give up or they do a desperate act, so some kind of major destabilizing move in the Straits of Hormuz or something like that. I’d like to know from you what your probability you attach to that kind of scenario. That’s one type of extreme scenario.

And then, you know, I get very different stories – I’m not an expert on this – I get

very different stories from people I talk to about the likelihood of an eventual attack by the Israelis or the Israelis – I don’t know – the Israelis and the Americans or the Israelis by themselves on Iran,

MR. DADUSH: And then, you know, I get very different stories – I’m not an expert

on this – I get very different stories from people I talk to about the likelihood of an eventual attack by the Israelis or the Israelis – I don’t know – the Israelis and the Americans or the Israelis by themselves on Iran, on the nuclear installations or nuclear potential installations, because some people say – you know, some people who are really knowledgeable say, you know, this is inevitable; you know, this will come at some point. If they become convinced that, you know, Iran is really building a nuclear arsenal and can deliver it, it will come. And

other people who say, including inside Israel by the way, who say this is crazy, this will never work. Anyway.

So these kind of two extreme scenarios, a desperate act by Iran or a desperate act, in inverted commas, by the Israelis – what are the – what is the likelihood of that kind of scenario? And then I’m going to talk to Jörg to see whether, you know, that kind of extreme scenario might upset – might upset the global projections that you have.

[00:51:08] MR. WEBSTER: So we’ll go through one by one. So the likelihood of Iran deciding

– and it has in – you know, earlier this year there were – was some saber-rattling about, you know, closing the Strait of Hormuz; they had some exercises there. But the reality of, you know, actually trying to make attempts to close the Strait of Hormuz with, for lack of a better term, their speedboat navy, I think would be – is very, very unlikely.

I think, you know, they’ve already got enough enemies within the region. And I

think that sort of act, aside from it also shutting off all sorts of other trade that is important for the region, would, you know, point everyone towards Iran. And I think you would – you would see a response, a multilateral response that would just be absolutely devastating to Iran. And it would, you know, destroy their ability to ever try that again. So I really don’t see it as something that they would try.

[00:52:13] In terms of what it would do to the oil price, obviously there would – there would be

an immediate implication. And it would – the length of that – of that price rise and how high it would go would deal with, you know, how quick the response was, how successful the Iranians were at trying to hold the Straits of Hormuz, you know, if they had any other allies that they were able to hold onto in the region.

I actually think in terms of extreme scenarios, you know, the likelihood of a – you

know, some sort of sudden agreement on enrichment is much, much more likely than Iran going out and doing something in the Straits of Hormuz. That doesn’t say that there isn’t a potential. There are so many ships in the Straits of Hormuz right now that you could have some sort of inadvertent exchange, but that would be rather limited, but you would still see an implication on the – on the oil price.

On the U.S. side – U.S./Israeli side, you know, we had a lot of our clients that have

come down and have been very concerned and have even identified the exact date that they believe that we’re going to – we or the Israelis are going to invade Iran. We are –

MR. DADUSH: Not invade Iran, but attacking. MR. WEBSTER: Attack Iran, yeah. MR. DADUSH: Yeah. Yeah. Yeah.

MR. WEBSTER: So the – MR. DADUSH: I hope – yeah. MR. WEBSTER: Well, you never – MR. DADUSH: Yeah, yeah. MR. WEBSTER: These are my clients, Uri, OK? (Laughter.) OK. But we just –

we don’t see that as really a potential, at least until after the elections. We do actually see a higher potential for something happening with Israel and/or the U.S. after the elections. And I would agree with you that if you actually speak with military leaders on any of these sides, all of them think it’s just a really bad idea. But politicians and military leaders don’t always – aren’t always aligned.

[00:54:00] MR. SADJADPOUR: I would agree that the – I compare the threat of Iran closing

the Strait of Hormuz akin to the threat of committing a suicide bombing, meaning that they would hurt others, but they would hurt themselves the most. They would alienate the Chinese, who is their kind of key strategic and commercial patron these days. But just the threat of it actually has been in the past expedient for Iran.

Oftentimes, you know, oil prices will be bumped up slightly, 1 (dollar), 2 (dollars), $3

a barrel. And my math on this may be wrong, but in the past when I did the calculations even a $1 – for every $1 increase in oil prices, it’s approximately $800 million additional annual revenue for Iran. So even a 1 (dollar) to $3 bump by threatening some general – threatening to close the Strait of Hormuz can be useful.

MR. WEBSTER: Or through a press release. (Chuckles.) [00:54:55] MR. SADJADPOUR: Or press release and things like that. So if you asked us to

quantify the likelihood, I would say less than 10 percent chance that they will actually follow through on that threat.

On the second issue of an Israeli or U.S. military strike, after Prime Minister

Netanyahu visited the United States for the AIPAC summit, my takeaway from that was that the likelihood of an Israeli strike in 2012 went down. And I would say it’s gone down even more significantly in lieu of all of these, you know, military and intelligence elite in Israeli speaking out against it. That said, my takeaway was that the likelihood of a U.S. strike in 2013, as Jamie said, went up somewhat simply because it seemed that Obama basically – and this was, you know, part of the strategy that was articulated publicly, to say that, you know, this policy of coercive diplomacy needs time to take shape; let’s give it some more months and see what happens.

And what I’ll end on is saying this, is that, on one hand, I think whether it’s Tehran or Tel Aviv or Washington, I don’t see any strong interest in some type of military conflagration, apart from maybe some of these hardline elements in Tehran who would see it in their domestic interest. All that said, I also don’t see a Venn diagram in which the following three circles intersect in one peaceful place. And that’s Israeli national security doctrine or Israeli psychology, Iranian revolutionary ideology and U.S. domestic politics. I don’t see where these three circles all intersect in one peaceful place. And you know, we can talk more about that in the questions.

[00:56:44] MR. DADUSH: Good. Jörg, I’m going to make it easy for you, because I know that

these political discussions are confusing. (Laughter.) The – give me what happens, $250 oil for three months – how bad is it?

MR. DECRESSIN: Look, that’s – let me take a step back – (laughter) – before I get

to – I don’t think I can quickly come up with a – with a numerical answer to your question. It certainly is going to be – it’s going to be very bad, there’s no question about it. And I’ll explain to you why.

And first, you had the two scenarios I think you can consider: that Iran is no longer

exporting anything, and then the Straits of Hormuz. These are two very different scenarios, because Iranian production is like 5 percent of world production. The Strait of Hormuz carries 40 percent of world exports. So two totally different scenarios.

Let’s stay with the first one for the moment. According to our estimates, if Iranian

production was to completely stop and there would be no offset anywhere, right, which is not what is actually happening, but if there was none, we would have thought that, you know, maybe oil prices would be 20 to 30 – would rise by 20 (percent) to 30 percent.

The question now is how much of that is already priced into the market, right,

because people are anticipating that there is going to be lower production in the second half of the year. And the remainder that is not priced in the market would then occur once the sanctions – I mean, once there is really a complete breakdown of production, if that is even a scenario – and would affect the global economy, right. And that might be some – well, that’s something less than 20 (percent) to 30 percent, if only because, you know, others will probably ramp up their production further to compensate for it.

[00:58:30] So 20 (percent) to 30 percent is something that the economy can marriage – manage.

We have a rule of thumb for these smaller price changes whereby, you know, a 10 percent higher oil price roughly cuts off .2 percent of real GDP growth. So if we say – if we, let’s say, had 20 percent higher oil prices, then our estimate for U.S. growth, which for 2012 is 2.1 percent, would be – would be 1.9 percent. That said, I’ve given you the .2 percent impact over one year. In reality, it actually happens gradually over two years pretty much.

So the point I want to make here is certainly this is going to hurt many people in the U.S. economy, some much more than others, also in other advanced economies and the oil importing countries. But that is a scenario that the global economy can manage. Now if you have other scenarios where oil prices rise by much more, they will come about in a – I would venture to guess – geopolitical setting that is somewhat more uncertain than what we have right now. And that would certainly not only affect the oil prices, but also financial markets more generally.

So you would probably have large sell-offs on stock markets. You would have fear

rising again. There would be less loans – I mean, loans – lending standards of banks would tighten. Central Bank’s already being close to the zero bound and advanced economies couldn’t do that much in order to lower interest rates and to counter the tightening of lending standards. Banking systems are still not very strong and so have less buffers to counteract.

[01:00:13] In the end, then, I mean, the impact may well be higher than the .2 percent loss of

GDP over two years for a 10 percent oil price hike that I have given to you. It would certainly be higher. So you can make your calculation once you get up to $250 per barrel; that’s a 100 percent – roughly 100-some, 150 percent increase in the oil price that will probably have a significant effect on the economy.

We’ve made a similar scenario – actually, since you mentioned a $250 oil price, we

have made a scenario where oil prices rise to such a level but over 20 years. And those effects would be – would be much more benign because the economy can gradually adjust to it.

So in a nutshell, I would say oil embargo and loss of production from Iran is one

scenario that we can cope with. Anything else will involve multiple events, not only a dramatic increase in oil prices but also – (inaudible) – of financial markets, that will leave the economy – that will deeply affect the global economy.

[01:01:14] MR. DADUSH: Excellent. Thank you very much. Well, I’d like to open it up to

the audience for questions. Please tell us who you are before you ask your question. And the mic is circulating.

Nida (ph), you want to – that gentleman there? Yeah. Q: My name – my name is Mike Sponder (sp). My son-in-law used to be the chief

financial officer (energy ?) department. And I was with the Office of Naval Research. My question is – because I spent some time with a man named Hannan (ph) in (Harvard ?) recently. He was the IEAE inspector 10 years in Iran. There’s almost zilch chance that any deal is going to be made that will give Iran some time. In other words, if – this is either going to be a deal where it’s a deal or it’s not a deal. It’s – they’re not going to buy time. So under those circumstances, with this “well, we’ll put it aside,” what is your view of, either

there will be a deal or there won’t be a deal; there will not be a putting aside? So my question to Karim is –

MR. : – want to take multiple, or – MR. DADUSH: Yeah, why don’t you start – take that one? MR. SADJADPOUR: I mean, I’m not sure I agree with the premise of the question,

because – did you want to go into more detail? Q: Well, politically the United States could not just – (off mic). MR. SADJADPOUR: Well, let me pose a hypothetical about one type of a deal that

could happen. And that is that Iran agrees to a cap, a temporary cap on 5 percent enrichment. There’s no way to lock it in permanently a hundred percent. That’s simply not possible. So Iran agrees to temporary cap on 5 percent enrichment. It agrees to send out whatever percentage of its low-enriched uranium, 80 percent. And it agrees to a more intrusive inspections regime.

[01:03:14] All of those three factors are changeable. Iran can at one point in the future say,

well, we’ve now decided we need to go beyond 5 percent enrichment. We’ve now decided that the inspectors are spies. You know, none of these factors are permanent factors. When and if the context changes, Iran can also change its calculations. So I don’t think that there’s some type of a deal which is going to be set in stone and which we can permanently count on. But I do think that even some type of an interim deal, which could buy us a year or could buy us two years – that would be something that seems to me the Obama administration would be happy signing off on.

MR. DADUSH: Yes, the gentleman there – (inaudible). Well, all right, yeah. And

then – and then you. Yeah. [01:04:09] Q: Adan Nowatanse (ph) from the Energy and Climate program here at Carnegie.

My question is for Mr. Jörg Decressin. It’s regarding oil prices and their link to government expenditures. I was – one thing that Karim mentioned was how this perception about what constitutes the desirable price for an OPEC country has changed in the past 10 to 12 years. I remember 12 years ago in a lot of meetings of OPEC you would see something like, if prices go above $25 that would be devastating for us. It will destroy demand and so on. Even if you factor into – inflation to the whole picture, it’s still the prices are too high to them – should be too high, but $100 is the price that seems to be quite desirable at this point.

Now I have been looking at the fiscal monitor that is provided by IMF and World

Economic Outlook. Looking at the expenditure of – especially of OPEC countries and the projections for expenditure, it does seem that some of these countries have started to reduce

their expenditure as percentage of GDP. And also the projections are that they will continue to reduce that. Could you explain what is the basis for this reasoning, that you are assuming that their expenditures will keep dropping as percentage of GDP? And do you think that this will have some kind of effect on the oil prices, or at least their perception about what constitutes oil price? Will we see the days when they would think that 70 (dollars) or $60 of oil is what is the desirable price?

MR. DECRESSIN: Honestly, on the expenditure question in terms of what we are

assuming about the expenditures of the Arab countries, I can’t give you an answer because I don’t have the – if I had the figures in front of me, then I – maybe I could. But in terms of oil prices, I think the oil price overwhelmingly is driven by, on the one hand, global demand, which is accelerating very rapidly, and on the other hand, a supply response that has been very sluggish, right?

And it’s not something that is very much driven by domestic consideration in Saudi

Arabia with respect to government spending. I think it’s – these – the other two forces are far more important. And as I said, for 20 years you’ve had very little – not – you had – you had a sluggish investment in energy production. And now this has been stepped up. But – (inaudible) – takes 10 years or sometimes more to get the oil to the market from beginning of exploration.

[01:06:50] And so I would expect that in the end these are the forces – these two, the demand

in the world and the supply – that will determine what will happen. And the equilibrium will be a higher price because supply becomes much more expensive to extract, as Jamie just mentioned. For example, the 80 (dollars) to $85 price for Canada is – what he mentioned, it tells you that the equilibrium will have to be higher. And domestic developments on the budgetary front will be – will be secondary.

I mean, in Saudi Arabia for example, there is also limits, right, to much – to much –

to the extent to which they have actually spare capacity they can bring to the market. I mean, they have still spare capacity, but they have also already brought a lot to the market, right? And they also face technological challenges that make it more expensive to (exploit ?) the oil. But overall it’s the two forces, supply and demand at the global level, that are much more important.

[01:07:42] MR. DADUSH: Is there anything you want to add – (inaudible) – or Karim? MR. : Nope, I think Jörg is – (inaudible). MR. DADUSH: Yeah. MR. SADJADPOUR (?): I have a question – and I guess Adan (ph) was asking

about the producers or the Gulf producers in terms of their sweet spot. But what about the

United States and Europe? What would – if you – is there a sweet spot that Washington has or that Europe has in terms of oil prices?

MR. DADUSH: Europe probably about zero, I would say. (Laughter.) Yes. No,

go ahead – (inaudible). MR. : Yeah, a dollar a gallon’s nice – (inaudible). (Scattered laughter.) MR. DECRESSIN: Look, I’m not aware of – you know, I’ve actually not even heard

talk in Europe about the sweet spot for oil prices. I mean, it’s something that has been taken as given by global markets, and you adjust policy in response to it. And that means you are – you are diversifying your sources of energy, right? You are reducing the energy intensity of production, and that’s a development that’s been taking place for 20 years. I mean, at this stage oil is used mainly for transport, so the challenges in terms of getting away from oil in that domain are a little bigger, right, than what we’ve had in the past. So this will raise some issues. But no, I – there’s no more I can say to that – (inaudible).

[01:09:06] MR. WEBSTER: Yeah, I mean, we have looked at this. And you know, politically –

it’s $4 a gallon when you see the politicians head down to the gasoline station off of Capitol Hill to talk about how horrible it is. But in terms of the reactions of us as American consumers, it’s actually around $3.50 when we actually start to bring down our demand and start to – and start to bring that down. That’s really the price that we’ve – that we’ve seen.

MR. DECRESSIN: But for how long will those prices be the ones that are the sweet

– I mean, the tipping points, right? I mean, this is something that has changed, right. (Inaudible.)

MR. WEBSTER: Yeah. And the reality is that you’ve also seen – and it’s a – I think

it’s relatively common knowledge around here that the increase in production here in the United States on both gas and oil, while it hasn’t really affected much at all on the oil side – you know, you’ve still got to pay the, you know, international oil prices – but the boom in natural gas and that bringing-down of that price, that has reduced our, you know, heating bills, electricity bills. So you see, you know, there’s less impact of the – of the global oil price on – you know, in terms of consumers. The actual impact on the wallet, however, from a mental standpoint – they still see that gasoline price every time they – you know, you ride by the gas (station ?).

MR. DADUSH: I actually meant to ask – I’ll come back to the audience, but I

meant to ask this question at some point. To what degree is there substitution between gas and oil? This shale gas boom, which may also be spreading to Europe and to other countries with these new technologies – does it actually in the long term have a significant impact on the price of oil, do you think?

MR. WEBSTER: The – you know, in the short term there’s really no quick way to

switch. In the United States previously the way that you could, you know, quickly switch was moving off of, you know, diesel-fired or, you know, fuel oil-fired power generation,

which is largely in the Northeast and down in Florida, and move that over to natural gas. But that is a cycle that is largely complete now, and you can’t really do it. There is some, you know, potential for compressed natural gas vehicles. But either you have a compressed natural gas vehicle or you don’t. You don’t suddenly just switch one day or the other – unlike, you know, say, the Brazilians, who can switch between all ethanol or all gasoline.

[01:11:33] Longer-term there is a potential to start to – you know, to move further away from

oil. But what is holding it back, in my mind, right now is something that Jörg was talking about earlier, which is something that neither producer or consumer countries really like, with everything that has been going on. And that is the volatility of the price. You know, it’s – you know, it is not so much what is the sweet spot – is it $100 or $70 or $60? What actually everybody would really like is just say, here’s the price. You know, it’ll go a little bit up and down, but this – you know, in the last several years we’ve gone from – you know, the range of prices on Brent have been $147 at the top end and $34 at the bottom end. And that’s a – that’s a amazing swing. And on the natural gas side in the United States, in the last several years, $2.90 and I think $10.45. I mean, it’s an amazing swing, and it’s very hard to both make plans for capital investments, to plan for your – you know, your kind of business cycle.

[01:12:37] And then at the consumer side, it’s – you know, when you’ve got this expense that is

just, you know, going up and down and you don’t really have that capacity in the short term to adjust it, you really want to kind of – that’s one thing that everybody is – you know, is completely aligned on, is everybody would really like to get back to a much less volatile price.

MR. DADUSH: Good. Now there was a gentleman there in the middle who had

their hand up a while. Yes, please. Q: Thanks very much. Michael Howells from the British embassy. I’d just say on

the sweet spot for Europeans, given that we spend about three times as much on gas as you, I think we’ve completely forgotten what the sweet spot is. (Laughter.) But anyway, just a personal aside.

Thanks very much for an interesting conversation. (We’ve ?) heard quite a bit about

one of the impacts of sanctions which has been on Iran: restrictions in Iran’s ability to sell the oil it produces. I wanted to ask you about a second one, which is a – is a consequence of all of the international banking sanctions that are out there: their ability to actually get money for what they do sell has been heavily restricted as well. We’ve seen them switching to sort of barter arrangements with various countries or taking payments in local currency rather than rial and so on.

So my question first of all for Jamie is, do you have a sense of, in terms of their

actual revenue receipts, what the impact of sanctions has been there? And secondly for Karim, following on from that, you know, how is that likely over time to affect regime decision making, do you think? Thanks.

[01:14:00] MR. WEBSTER: I mean, for the – for quite a while, actually, it was essentially the

Obama administration’s policy to try to – not try to actually impact Iranian oil. They still wanted the oil to flow; they just didn’t want them to get paid for it. And so they had a number of – a number of sanctions go through on the banking side to really kind of slow that down. So you know, it would take, you know, a few months.

And the – and the real place where you saw this is with India, where it had to move

from country to country to try to find a vehicle to move things back to Iran. And so even if the money did eventually flow to Iran, just having it delayed by several months was – you know, was considered a victory by the Obama administration. And so you started to see it and realize that when it comes to oil markets, essentially all oil is traded in dollars, even if the U.S. has nothing to do with it. Generally, you know, if you’ve got Saudi selling to the Chinese, it’s in dollars. So you started to see the Iranians start to move towards, you know, as you said, the barter arrangements or, you know, going into rupees.

[01:15:05] The impacts that it had on – you could definitely see it. It was – but it was really

difficult to exactly ascertain how the impact – essentially you had to do the – you had to do the calculations yourself, and that is because previously Iran was, you know, one of the most – one of the greatest countries to analyze economically because they had so much data available. It used to be such a fantastic country in terms of data availability.

But since Ahmadinejad has come into power, their amount of data that they provide

on, you know, their high frequency economic data has really shrunk up. And so you really have to kind of figure it out yourself. And so it is difficult to determine, OK, well, was this payment delayed a month or was it – or was it three months. Clearly there was impacts. And you – and the way you could determine that was how much they were trying to figure it out and how big of a – of these charges were building up in Korea and in India.

MR. SADJADPOUR: A couple points, and that is that in the past three decades

when you look at when Iran has made major compromises, whether it was ending the Iran-Iraq war in 1988 or the decision in 2003 to suspend enrichment of uranium, there have been a couple of factors at play. One is that oil prices have been very low when they ended – they made the decision – Ayatollah Khomeini made the famous decision to swallow the poison chalice. Oil was, I think, $9 a barrel. As I mentioned, in 2003, when they agreed to suspension of uranium enrichment, I think it was around $25 a barrel. So oil prices were low.

And the other factor was that the individual who was really spearheading this

compromise wasn’t the current supreme leader, Ali Khamenei, it was the former president Hashemi Rafsanjani, who comes from a merchant family and all of his four – all of his children – his four sons – became businessmen and merchants. And you look at the individual of Khamenei, he comes from a clerical family and all of his four sons became clerics. So they have quite difference in temperaments. And as I mentioned, oil prices are

quite high. And this is maybe a tangential answer to your question about how it will affect the regime’s calculations.

[01:17:24] One of the things I think we oftentimes forget is, you know, on one hand, there’s

data, as you mentioned, and the realities of facts on the ground. But I think we oftentimes lose sight of whether autocrats get that correct data from their advisers. And I think what’s remarkable for me is how history repeats itself over and over again in the case of these dictatorial regimes, that you have an autocrat who basically – he – in order to consolidate power, he gradually purges all of these elements within the system who don’t agree with him or aren’t unfailingly loyal to him. And that’s what become – that’s what happened in the past few years with Khamenei.

And so you look at the downfall of – you know, going back to the Shah. It was –

the – one of the problems was he had surrounded himself with all these sycophants who only give him good news. Saddam, Gadhafi, Bashar – we see very similar phenomena in all these cases. So that’s one of the things that I kind of keep my eye on Iran is whether Khamenei is actually receiving objective information from his very, very, very small inner circle and whether he has a realistic grasp of the realities on the ground. I’m not convinced he necessarily has that these days.

[01:18:57] MR. DADUSH: Good. OK, we have quite a few questions, so I’m going to group

them and then come back to the audience. The lady there in the middle. And then the lady here and the gentlemen. Yeah.

Q: Hi. My name is – (name inaudible) – and my question is for Mr. Jamie Webster.

Do you think that the increasing oil production in Iraq will have any effect on the oil prices? And if so, how?

MR. WEBSTER: No. No. We’re very bearish on Iraq, where we do a lot of work

with the companies that work in Iraq. We are – we are present there fairly regularly. And so Iraq’s plans of – I think it was, you know, 12.5 million or 17 million barrels, whatever ridiculous number it was that they put out by 2017, we are, you know, extremely bearish that they will, you know, even be able to get much above their current levels in the short term. I think we expect them to grow by around 200,000 barrels a day, but I think our longer-term projections is around, you know, 4 million barrels a day. And as my former boss always said, any time they get over 3 million barrels, they get itchy to invade someone. (Laughter.) So – but right now it really is – we are increasingly, you know, bearish on them. And if you go and pay attention to what’s going on in Iran, they’re actually have – you have the makings of a potential confrontation not outside of Iraq but actually within Iraq with – not just with the KRG and the federal government but just with Maliki and those are – that are aligned against him within Baghdad.

MR. DADUSH: We’re going to take two or three and group them and then come back to the panel.

Yes.

Q: (Inaudible) – Johns Hopkins. My question is to Karim. It’s about domestic impact of sanctions on Iran. Actually, it’s a double question, but very brief. The first point is, you mentioned the fact that the Iranian case is different from the Cuban case, meaning the population downplaying the sanctions so much about – for the hardship of the economic situation. Is there anything changing the last few months? I’ve seen that there’s a Gallup poll that was released in February that indicated that a greater share of the population somehow see a link between inflation soaring and so on and so forth and the sanctions that have been imposed. So my first question is, is somehow changing the situation in this regard.

[01:21:33]

The second question is about the consequences of sanctions on the possible competition within the leadership. Is it possible that, for example, Khamenei is going to use the change in the economic policies of the government for instrumental reasons in order to delegitimate the incumbent government? Thank you.

MR. DADUSH: The gentleman here.

Q: Thanks. I’m Garrett Mitchell, and I write the Mitchell Report. And I’ve been sitting here trying to sort through an hour and a half or whatever it’s been of conversation. And I don’t know what’s the Freudian anal in me that sort of says well, so what it is we’ve said or we’ve learned here today? And I’m having some trouble trying to sort through, you know, a one, two and three.

And the only way I could think of to sort of get at that question is to say suppose that the title of this panel today, instead of “Iran Oil Prices and the Global Economy” had been “Nigeria, Venezuela, Oil Prices and the Global Economy”? What would we have been – would we have been having – because Iran is such a loaded – it comes with all sort of baggage – you know, the theocratic republic and the supreme leader and all those sorts of things.

MR. DADUSH: Right.

Q: So I’m trying – I’m trying to sort out –

MR. DADUSH: What is different.

[01:23:09]

Q: What is different. And if we had – I mean, aside from we’d probably had some different people on the panel, but if it had been Nigeria and Venezuela, what – would the conversation have gone a lot like this? Would it be different? And in – so let me just leave it there.

MR. DADUSH: OK. Well, that is – that’s a very good question. And I think it – it’s a question that we can address to the whole – to the whole panel. Is there – is there any other question? Because I’ll take a couple more and then come back to the panel for closing remarks, including addressing that question.

Yes.

[01:23:51]

Q: Paula Ker (ph), retired Department of the Army. I think this is Jamie. We hear so much about – from the government, from the public, everybody – saying that the problem is speculation and that most of these people aren’t airlines, they’re speculators. They don’t have anything in the market. But that’s true with any commodity market. If you’re in wheat or cotton or anything, most of the people in that market are not farmers, they’re not grain elevators: They’re in there to speculate. So I don’t really see the difference. Is oil different? And maybe these incredible swings you were talking about – is this a problem of speculators? But on the other hand, what can we do about it? We can’t cut off the commodity markets. I don’t see it, what they’re complaining about.

MR. DADUSH: The lady here. Yeah, there’s the mic there, yeah.

Q: (Name inaudible) – representing myself. I just wanted to ask kind of a question on the supply side. And what I heard from Jörg was that, you know, there is an issue with investment, and there is maybe some regulatory impediments that explained the – maybe the lower intensity in production. But Karim mentioned some sort of maybe collusion between the oil companies. And I was just wondering – and I’m not coming at this from a conspiracy standpoint, but I just wanted to understand if – you know, if the rest of the panel, and maybe you can elaborate on it, Karim, some more – you know, there is some historic precedents for that, you know. To what extent – you know, as the lady was saying, you know, can that explain the swings, and is that a factor in the oil prices?

[01:25:34] And also, just on the supply side for Iran, you know, because there is this issue with

investment, and, you know, that is going to affect production. And that – you know, that is Iran’s Achilles’ heel, in a way – I mean, oil. So how do you see Iran, you know, approaching this whole issue in the long term – I mean, with the sanctions, without the sanctions?

MR. DADUSH: Good. Are there any other questions? The gentleman here, yes. Q: Hi. Jamie Crawford with CNN. I just had a quick question about if you’re – and this is, I guess, for Mr. Webster –

are you seeing any, with respect to U.S. allies like India and South Korea, a diversification away from Iranian oil? I know there were – after the legislation was passed in the – in the Senate, there were reports that India was still buying a lot of oil from Iran. And some analysts had said, well, it’s because Indian refineries, you know, work better with Iranian crude as opposed to other types of crude. I’m just curious, as we get closer to this deadline in July, are you seeing any – specifically India and South Korea diversifying their stockpiles from Iranian crude?

MR. DADUSH: Good. So why don’t we go – why don’t, Jamie, you start, and then

Karim, and then Jörg, anything you want to pick up on. Yeah.

MR. WEBSTER: I’ll hit the easy one first on India and South Korea. Yes, you’re correct. We did see – you know, there were a number of countries – and

I want to make sure that it’s clear here: On the July 1 sanction deadline, that’s really about the EU, whereas the – all of these other countries are really trying to comply with the U.S. sanctions, and this – you know, essentially being able to get a pass or a – or a, you know, “good job” from President Obama so that they will not have sanctions laid on them over the next 180 days of which, I think, 11 countries were granted that.

India did increase its take from Iran quite a bit in the first quarter, and part of this

was about the refineries, but it was also partly – I think they recognized that it was, you know, kind of a – they could probably get away with it in this – in this short term. India is, you know, kind of fractious, you know, in that, you know, the government was of one mind, but some of these – and some of the refiners were of one mind of trying to move away from Iranian supplies while others were dragging their feet a bit. But I expect that they will start to bring down their imports of Iran. But they’re not going to shut them off; they will just bring them down slightly.

[01:28:11] I’ll hit a couple of the other ones. On speculation, even in my own company, we’re

always arguing back and forth on what the real impacts of speculation (are ?). My mind is that essentially, it exacerbates the volatility a bit. I don’t – you know, the reality is there are fundamental reasons while the oil price is substantially higher than it was, you know, 10 years ago. It is – you know, it is about supply and demand; it is not just the presence of speculators. That said, any time the price gets high, everybody starts to raise the specter of speculators, and that’s not just from the politicians here in the U.S. The Saudis always raise it as well because it gives them a nice pass on why – you know, why the price is so high. It’s not us it’s really about; it’s really the speculator.

And then as to what did we learn here today, well, I guess it depends on how much

you knew when you first walked in here. (Laughter.) But if we had had a panel that would – said, you know, what is, you know, Nigeria and the implications for oil supply, I think what you would have found is everybody would ask, well, why aren’t you talking about Iran?

MR. DADUSH: (Laughs.) [01:29:26] MR. WEBSTER: And that is because when it comes down to it, in terms of the –

what is going on in the oil markets right now, it is really about Iran. And the potential for a breakthrough in sanctions or the potential for Iran to do something or the U.S. to do something has a greater chance of impacting things than, say, Boko Haram or MEND in Nigeria, you know, cutting off some of the production out of – out of Nigeria.

MR. SADJADPOUR: A few points about domestic inflation and whether people in

Iran are linking that to sanctions and whether that’s going to affect the regime’s calculations.

I would say that the economic welfare of the Iranian population has never been a first or maybe even second-tier concern of the Iranian regime in terms of their political calculations. I mean, this is a government which prolonged the war with Iraq for several years for domestic political expediency. So I don’t see, even with, you know, people complaining a lot about inflation and the deteriorating quality of life, that that’s going to compel – on its own, compel the regime to make significant nuclear compromise. I don’t see that happening unless they feel a real – what I describe as an existential angst, that the future of the regime itself is at stake.

[01:30:56] In terms of how the people react to sanctions and whom they blame for the

sanctions – this is a question I’m often asked – my response is that – my sense is that sanctions and deteriorating economic circumstances as a result of sanctions often tend to accentuate people’s existing political disposition, meaning if you’re a supporter of the government and your quality of life is worsening as a result of sanctions, it’s one more reason to dislike what they call the global arrogance, to dislike the United States for its imperialist position. And if you’re a big critic of the government, it’s another reason to dislike the Iranian government for not worrying about your well-being, and, you know, there’s a common maxim I hear a lot from Iranians is that the regime does whatever it wants, and we pay the consequences. So it tends to accentuate people’s existing political disposition. But I don’t think sanctions turn regime supporters into regime opponents, or regime opponents into regime supporters. That’s one.

Second, with regards to just basically how the regime is talking about the sanctions,

this is something that I should have mentioned from the onset, but that is that they’ve actually changed their rhetoric with regards to sanctions for two decades. The Iranian Supreme Leader Khamenei actually used to praise sanctions. He said that – he said sanctions are actually helpful to us because they force us to become self-sufficient. And he would always, you know, consistently say that, you know, we welcome sanctions because it forces us to be self-sufficient.

[01:32:46] Now, they’ve made the removal of sanctions as a premise of the upcoming nuclear

talks. And there was a funny statement I saw; he didn’t mean it to be funny, but one of the close advisers to the supreme leader, Haddad-Adel, who’s a former speaker of the parliament, said that sanctions have no impact on us whatsoever, and they force us to – force us to be self-sufficient, but our chief goal in the negotiations is to remove the sanctions. (Chuckles.) So you can figure out, you know, what they want for themselves.

Now, the last question about the long-term impact of sanctions in terms of their

foreign – their ability to keep production levels, there is a statistic that I’ve been – I remember seeing back in 2001, you probably saw it as well, and this was Khatami’s oil minister, who said that in order for Iran to maintain its current level of oil production, it needed $100 billion investment over a decade. And at the current rate, they were only getting half of that in terms of foreign investment. And that number, the amount of foreign investment, has dropped precipitously over the last five, six years as a result of sanctions and

increased political risk. So that investment is not coming in. The production is gradually decreasing. And this goes back to the conversation we were having earlier about, you know, is the leadership in Iran – is Khamenei kind of fully aware of the gravity of the situation he’s in? I’m not sure that he is.

[01:34:26] And I’ll just end by saying that, you know, one of the discussions which – one of the

questions which is commonly asked is whether or not the Iranian regime is rational. Is this a rational regime? Are they a rational actor? And the answer I will say is that for me, they are in that what’s paramount for them is to stay in power, what’s paramount for Khamenei is to himself stay in power and keep the regime in power. So for me, that, you know, is maybe a form of rationality.

That said, I think that if Khamenei simply believes that Iran is – if Khamenei is –

believes in his head that Iran is only pursuing a nuclear energy program, then he’s totally irrational. Or that – if he believes that this nuclear energy program makes economic sense for Iran, that’s a totally irrational calculation, because the costs of this program have been astronomical for Iran in terms of its – you know, the sanctions and the political isolation. And the potential benefits of this nuclear program are really negligible. This is kind of a program which employs obsolete third-, fourth-rate technology and it’s miniscule. It can provide a miniscule amount of the energy which Iran needs in comparison to, you know, the oil and gas that it has, which it isn’t really capitalizing on.

Q: Thank you. MR. DADUSH: Yeah, Jörg. MR. DECRESSIN: Yeah. Let me take a couple of the questions first on the supply

side. I think we believe the overwhelming determinants here are, first, that oil prices have been very long for – I’m sorry, very low for a long time, right up until the early 2000s. And so the incentives to explore weren’t really there. Second, exploration itself, once it starts, takes a long time before it gets oil to the market – 10 years or so, depending on how you go about it. And the third is that the – that the sources of oil that you’re exploiting now are just much more expensive to exploit. You have to go into the deep seas or in the sands, and so that creates technological challenges, and they have to be addressed. And that takes time. So these are – these are the overwhelming determinants of supply.

Regarding speculation, I mean, in Europe and in various places, it’s a pretty loaded

term. I mean, I think what we agree on right now is that probably there is in the market some kind of a premium that anticipates – you know, in anticipation of less output from Iran going forward. People are hoarding oil in anticipation of less supply in the future. I mean, that is – they are speculating that the oil price could rise because supply goes down. That’s a very legitimate and normal activity. And it sends signals to others that maybe they ought to – there is an incentive for them to increase the oil production.

[01:37:21]

What you have had over the last decade is, however, a development of assets – financial assets that are priced off oil prices and other commodity prices. And that’s new. So people look at this and they say that, well, you know, this is people, you know, gambling in the markets and not sending – and you know, adding to volatility of the oil prices by coming in and out of these markets. Again, there our take is much more mixed.

I mean, we – it depends very much of what kind of investors you’re attracting these

instruments. If these are informed investors, right, then they will improve the signals to producers in terms of what they should do in the future. If these are uninformed, or what we call noise traders in the nerdy economic literature, they will merely add to volatility. And you probably have both types of investors to different degrees in the market at different points in time. But on the whole, I do agree with you that this debate on speculation is really not a central – shouldn’t be a central issue right now. [01:08:30]

Would we have – so what about Nigeria and Venezuela? I mean, I’m the economist. You tell me $10 per barrel more, wherever it comes from I don’t care. So for as long you have the position that the oil price is happening in a similar geopolitical context, whether it happens in Iran or whether it happens in Nigeria or Venezuela, you wouldn’t care. But if it’s a different geopolitical context, then presumably it would also have different effects on financial markets and more generally on attitudes towards risk and uncertainty. And it would have different consequences for the economy.

MR. DADUSH: OK. Let me finally ask our panel for a closing remark. And I’d

like, if possible, for them to address the following question. So I am a finance minister or a CEO, and I am worried that I’m going to be hit by, you know, another oil price shock coming from Iran. What’s the – what – what’s the – in a – in a – in a – in a nutshell, what’s your conclusion or advice that you want to give to this finance minister or CEO worried about such a shock?

Karim, you want to start? MR. SADJADPOUR: I would say a couple things. I would say, one, the nuclear

imbroglio we have with Iran – and I say this from this vantage point of the United States – is not the cause of U.S.-Iran tension; it’s a symptom of U.S.-Iran tension. And there’s a much deeper political conflict here at play. So I think we should tell this finance minister that it’s unrealistic that there is going to be some type of a grand bargain which resolves this issue once and for all.

Second, I would say that, for me, what I’ve always told European, Chinese, Russian

officials is that it’s somewhat less important for me, the talking points which are – which they use, in terms of the contours of some type of a final agreement. What’s more important is there is some type of a unanimity that when Iran meets with European diplomats or U.S. diplomats or Chinese diplomats or Russian diplomats, they hear the very – the same thing, because when diplomacy and the prospects for some type of a diplomatic resolution, I think, are at their worst is when Iran is able to kind of create fissures between, you know, the Europeans and Americans. That was what they were able to do during the

Khatami era, or now what they’re trying to do is create a wedge between the Chinese and Russians on one hand and the EU and the U.S. on the other hand.

[01:41:06] So again, for me what’s less important is what is the deal which is offered to Iran, but

the fact that, you know, all parties in this P-5 plus one talk are on the same page and kind of share the same talking points with Iran.

MR. DADUSH: Thank you. Jamie? MR. WEBSTER: I guess I would – coming off of Karim, I guess I would reiterate

with this – with this finance minister that – regardless of what’s going to continue to happen, that you’re going to continue to have increased and pretty high levels of oil price volatility; and to be – you know, to have his company or country prepared for that, that there is a potential that you’re going to see some softening of oil prices in the next couple of months, but that any price below $100 is probably – should be looked at more as a buying opportunity rather than, you know, a real move strongly down there permanently.

[01:02:04] Also, the – you know, there is that potential still for a price significantly above the

prices that we have right now. But that – at least in our mind, you know, prices much above 120 (dollars), $125 – and this is from a PFC standpoint – you know, the global economy is really, at this point, not able to handle it now. A couple of years from now, that may be – that may be different.

MR. DADUSH: Thank you. Yeah, Jörg. MR. DECRESSIN: I mean, first, I would say that your energy policy should always

be guided by medium- to longer-run considerations. And now if you come to the conjuncture, we would have several messages. I mean, to the finance ministers, we would say: Look, if as a result of higher oil prices your economy doesn’t grow anymore as much you expected and therefore your revenues are not anymore as high as you expected, do not cut expenditures in order to meet your original targets. Let automatic stabilizers work. Go with a larger deficit to accommodate the economy, rather than going against it by consolidating yet more.

[01:03:12] And the second point we would make – and that is regarding central banks – it is

important to keep a medium-term focus on price – on – of price stability. If we have either a short-term increase in the oil price or if it is just an increase in the oil price – that’s to say a relative price increase and not a generalized price increase – look through it. There is no reason to be alarmed and rattle the sabers over too-high inflation. On the contrary, stay the course.

And then finally, I mean, since high oil prices do affect the poorest segments in the population always more than the others, you can have a conversation whether you do want to do something for poor people, if you want to expand social programs or not. But let’s not forget that we are in a period where budgets are pretty tight in the advanced economies, so there the scope is not that large. It is different in many emerging economies. I mean, you take, for example, China – they have a much better budgetary position; they can expand their social programs. Also other Asian countries can do this and thereby weather the shocks better than otherwise. So that’s where we would be, Uri.

[01:04:29] MR. DADUSH: Excellent. Excellent. Look, so I’ll draw it to a close, just to say

that, you know, from my standpoint, I finish this session a little bit more reassured than when I came in, about both the likelihood of a major shock originating in Iran in, you know, the foreseeable future for oil markets and the global economy; and also, in the event of some significant increase in oil prices, that the world economy is better positioned – better positioned to manage it.

I always hesitate to draw a positive conclusion from our events – (laughter) – from

long experience. But there you are. You know, sometimes you never learn. So thank you very much, all of you, for joining. And thank you very much to our panel. Well done. (Applause.)

(END)