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Iranian nuclear deal could negatively affect Michigan's small oil industry

Jul 16, 2015

Amid all the discussion of the pros and cons of the proposed Iranian nuclear deal announced this week, there’s one Michigan industry that may be affected.

Michigan’s oil industry isn’t very big, but it has been growing.

Credit Michigan Oil and Gas Association

The growth has been spurred by high world crude oil prices.  Or at least, had been spurred.  After reaching nearly $110 a barrel last summer, world crude prices crashed under $50 in January.  After a brief rise to around $60 in the spring, the price is back down in the lower $50’s. 

A glut of oil is blamed for the price drop.  And Iran’s reentry into the market could add to the problem.

Iran has by many estimates tens of millions of barrels of oil waiting in inventory to be sold. They will hit a market already dealing with a glut of oil and relatively low prices. Then the country will start increasing production, which could eventually add another 600,000 barrels of oil a day or more, but that production increase is expected to happen gradually.

The timing depends on factors like when sanctions against the country are lifted, how Congress views the agreement, and how quickly Iran can increase production.

Several analysts say they don't believe Iranian oil will have much of an influence on prices until 2016, when that stored oil is expected to start hitting the market.

More oil on the world market in 2016 would mean less incentive for oil companies to drill in Michigan next year.

Erin McDonough is the president of the Michigan Oil and Gas Association.

She says exploration in Michigan is down this year because of the dramatic fall of global oil prices. An influx of Iranian oil will probably mean even more cuts next year.

“Lower crude oil prices have a pro and a con,” says McDonough. “The pro normally means lower gasoline prices. It also means less exploration for new supplies.”

There are other factors that may keep global oil prices from falling.

Key oil producers like Saudi Arabia could lower production to help stabilize or firm up oil prices, but they might lose market share in the process.

Demand also influences prices, and that can depend on the health of global economies.

The Iranian nuclear deal is also a wild card. The agreement faces strong opposition in the U.S. and elsewhere and could potentially not be approved.