Iran’s reentry to the oil market may keep US gas prices low, but that may be the only positive effect on the economy. Concerns are growing that the oil rich nation will further exacerbate the negative impact of the current saturated crude market now that nuclear-related sanctions against Iran have been lifted.
Iran boosted crude output to 500,000 a barrels a day last week and plans to eventually increase output to 1 million barrels a day. After years of economic isolation, the country needs to draw revenue for its troubled economy and wants to take back market share. Some doubt Iran’s capacity to even produce its current output goal since the increase will require billions of rials that could take years to raise. Nevertheless, Iran is ready to sell its oil sitting in storage. Inventories are at estimated at 18 tankers with 12 million barrels of crude oil and 24 million barrels of condensates. Experts say this volume can depress global prices.
Oil oversupply in the world market normally leads to cheaper fuel prices and a economic boost in the US. Since mid-2014, crude prices have fallen from $110 a barrel to below $27. As expected, gas prices have slipped to under $2 a gallon, but the economic windfall has yet to be realized. The culprit is the lack of consumer spending and the impact that lower prices have had on energy companies. Consumers are not spending their savings from cheap gas and oil producers are coping with decreasing revenues by reducing their workforce and activities.
The lack of consumer spending and the sudden decline in crude prices in less than two years, has offset the benefits of low gas prices and has led to domestic challenges rather than advantages.
Last year, 114,000 oil and gas related jobs were eliminated nationally. Beyond the job market, energy-producing states such as Louisiana, Oklahoma and North Dakota have lost significant tax revenues. Texas, the top oil and gas producing state, is slated to cut public projects such as building more highways to offset the losses due to the decline in energy-severance taxes and the increase cost of public-assistance programs for those out of work. Alaska is bound to face several fiscal challenges since 79 percent of its operating revenue comes from oil. In the last month, the state proposed its first income tax in 35 years, announced a government hiring freeze and lost its Standard & Poor’s AAA credit rating due to its growing deficit.
These consequences from low oil prices will not be resolved any time soon now that Iran is back in the market. Its increased output is predicted to contribute to crude prices slipping under $20 a barrel in the near future. Considering this outlook, it is not surprising that economists at JP Morgan and Goldman Sachs do not expect significant economic growth from oil.
The pessimistic forecasts, however do not imply that the US is heading into a recession. Job growth and consumer spending are healthy despite less than optimal levels given low oil prices.