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Iranian oil would change the game for Russia

Washington insists that its decision to release five million barrels of crude from its vast strategic reserves is merely a test of the distribution system and is not designed as a warning to Russia, as some analysts have speculated.

The timing of the first such sale in nearly a quarter of a century seems suspicious, coming just days before the "referendum" in Crimea to join the Russian Federation. But if the idea is to remind Russian President Vladimir Putin of the economic risks of his Ukrainian adventure, freeing up less than 1 per cent of the mammoth U.S. oil hoard sends a pretty feeble message.

There is, however, another wild card out there that could definitely do the job of driving down oil prices, putting a severe crimp in the Kremlin's vital revenue from energy exports. That would be Iran, whose re-entry into world energy markets would give Germany and other major energy importers considerably more leverage in dealing with the Russians.

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Which is somewhat ironic, as Russian support has helped Iran struggle through economy-hobbling sanctions. Even though many of those international sanctions remain, the two countries are poised to develop closer economic ties – including a plan to exchange Iranian oil for another nuclear generating unit, technology and other equipment.

Iran negotiated an interim deal last November with the P5+1 – the UN Security Council's permanent members, the United States, Britain, France, Russia and China, plus Germany – to halt its nuclear program, and even roll back parts of it, for six months in return for some relief from sanctions. Meanwhile, the two sides are to work on a more lasting agreement to ensure Tehran never joins the nuclear-weapons club.

The change in the country's status from pariah to merely suspect is already having an effect on the oil market, although some limits on Iran's key petroleum exports remain.

Under the agreement, which took effect Jan. 20, Iranian oil shipments can't average more than a million barrels a day. But data from the International Energy Agency show that Iran exceeded that average in the first two months of the year, primarily to key Asian buyers – India, South Korea and Japan.

The Wall Street Journal notes that if Iran maintains current production levels, it would amount to about $6.2-billion (U.S.) in additional revenue for the beleaguered country this year. Add large sums coming from the sales of petroleum-based chemicals, on which sanctions have been lifted, and Tehran suddenly has a big incentive to keep its critics happy so it can continue to increase its output.

When that happens, only sharp cutbacks by Saudi Arabia, Russia and other key producers or a surge in demand would keep prices from falling. But the Saudis would be only too happy to poke the Russian bear.

Mr. Putin needs to keep oil money flowing into his coffers at maximum levels, but persuading Iran to maintain the status quo will likely prove impossible. Russia's assistance will have to outweigh the billions of dollars worth of reasons for Iran to to do whatever it takes to reach a more permanent deal, abandon its destructive nuclear ambitions and re-open the oil taps.

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About the Author
Senior Economics Writer and Global Markets Columnist

Brian Milner is a senior economics writer and global markets columnist. In a long career at The Globe and Mail, he has covered diverse business beats, including international trade, the automotive industry, media, debt markets, banking and the business side of sports. More

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