Iran Wants More Money From You

Americans spent more money on gasoline in 2012 than in any other year... ever. Meanwhile, here in 2013, retail gasoline prices spiked to $3.60 a gallon on average -- $3.94 on the West Coast -- the sharpest rise in prices seen in the past three months. And Iran is happy to hear it.

In fact, if the Islamic Republic has anything to say about it, Americans could wind up paying even more for gas than we already do. Right now, a barrel of benchmark crude costs about $95. But over the weekend, Iranian Oil Minister Rostam Ghasemi was quoted arguing that "the price of crude oil [should] remain at about $100." Ghasemi thinks that price "is fair, and Iran supports it."

Fair is in the eye of the beholder
Of course, that's fine for him to say. After all, Iran gets about 80% of its revenue from selling oil abroad. Inside the country, however, motorists enjoy subsidized pricing on gasoline, which limits the cost for many motorists to as little as $1.25 per gallon.

So this is kind of an inside joke, what Ghasemi is telling -- $100 is a fair price to pay... because most Iranians aren't paying it. They're paying the gasoline equivalent of closer to $33 oil.

Ha, ha
American consumers, on the other hand, aren't laughing. Not with the cost of gasoline now consuming $4, on average, out of every $100 we spend on daily living -- the highest percentage of our living expenses seen since 1983.

And yet, at the same time, Iran's targeting a $100 price of oil does pose the country with a bit of a dilemma. Over in China, the engine that's kept the oil price machine humming, demand for oil hit an eight-month low in April. And according to Economics 101, lower demand generally portends lower prices rather than higher.

Meanwhile, strong-ish retail sales numbers are lending strength to the U.S. dollar. And with most oil contracts still being denominated in dollars, a strong dollar tends to result in lower prices for crude.

OPEC -- the Organization of Petroleum Exporting Countries -- plans to meet in Vienna on May 31 to discuss how the cartel will respond to these dynamics. At present, most analysts expect OPEC to maintain a target production rate of 30 million barrels per day. However, if the idea is to raise prices in a scenario of sagging Chinese demand, and robust U.S. dollars, OPEC might well have to reduce its output in order to maintain pricing power.

Decisions, decisions
At least, that's how these things have worked historically. You see, OPEC's job, in a nutshell, is to keep prices high enough to maximize the profits of oil exporting countries -- while at the same time not letting prices rise so high as to discourage demand for oil -- and the development of alternatives.

Raise prices too much -- or, what's really the same thing, cut supply too much -- and you just encourage companies like First Solar (NASDAQ: FSLR  ) to develop cheaper and more efficient solar panels, and General Electric (NYSE: GE  ) to invest more in wind turbine production. In the long term, that's a bad business idea for oil producers.

On the other hand, if you allow too much oil to be produced, prices fall, and OPEC members start leaving money on the table. So getting the oil price to $100 -- and getting it to stick -- isn't as easy as it sounds.

He who fracks first, laughs last
Complicating matters for Iran, and for OPEC, is the revolution in "fracking" -- drilling for oil and gas with the assistance of hydraulic fracturing technology -- in the U.S. As companies from Chesapeake Energy (NYSE: CHK  ) to Sandridge (NYSE: SD  ) pioneer the practice, and move it into the mainstream, they're doing their part to make the U.S. truly independent of oil price hikes by countries like Iran.

Indeed, in a recent report on energy trends over the next couple decades, British oil giant BP (NYSE: BP  ) basically came out and predicted that thanks to the efforts of the frackers, the U.S. will become "energy independent" by 2030.

Granted, so far this hasn't been terrific news for the companies doing the heavy lifting. The high cost of getting this effort off the ground, coupled with a glut of natural gas that is being produced, has left both Chesapeake and Sandridge struggling to earn a profit.

But the situation's at least as troublesome for Iran and its cohorts in OPEC. Sure, they can curtail oil production to try to put a floor under oil prices. But the only sure result of cutting oil production at OPEC is that OPEC will sell less oil, and probably collect less oil revenue. On the other hand, there's no guarantee that a price hike will hurt us. And there's no guarantee that new U.S. production won't take up much of the slack for the rest of the world, either.

It almost begs the question: What if OPEC held a price hike party, and nobody (in the U.S.) came?

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Read/Post Comments (20) | Recommend This Article (3)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 18, 2013, at 10:45 AM, Biztowner wrote:

    War propaganda

  • Report this Comment On May 18, 2013, at 10:45 AM, whytruthhurts wrote:

    Well, oil is cheaper than Coke and Pepsi or even a bottle of mineral water.

  • Report this Comment On May 18, 2013, at 11:06 AM, Weitzhuis wrote:

    That's why the Middle East is funding anti-fracking groups.

  • Report this Comment On May 18, 2013, at 12:01 PM, VegasSmitty367 wrote:

    We'll pay Iran more, while we export the same product. Sounds like stupidity to me!

  • Report this Comment On May 18, 2013, at 12:15 PM, aleks09 wrote:

    Biztowner --- agree with you --- war propaganda

  • Report this Comment On May 18, 2013, at 12:18 PM, AllenElliott wrote:

    Iran is just trying to extort money out of us like North Korea. They have the same reprobate mind

  • Report this Comment On May 18, 2013, at 12:19 PM, JackSmith2525 wrote:

    All propaganda. We export 25% of gasoline we make from importing crude. US consumer is on a string, milked by all multinationals. Watch gasoline prices go up up and away.

  • Report this Comment On May 18, 2013, at 12:29 PM, peterwolf wrote:

    Here's my plan: Since the dumb Californians won't extract the sizable oil and natural gas deposits they have, send in the Army Corp of Engineers, backed by the Army, and take it. If any Democrats get in the way, arrest them. I

  • Report this Comment On May 18, 2013, at 1:12 PM, Anish12 wrote:

    This makes no sense. First we are preventing them from exporting oil because of the sanctions we have in place. Second the Iranians only account for 5% of the world oil markets. In addition state subsidies for oil is common in many oil producing countries. Very dumb article

  • Report this Comment On May 18, 2013, at 1:33 PM, Iranian wrote:

    I'm from Iran, and must say that we are not happy for that and even or government.

    The responsible for that is American government that imposed sanctions against our country.

  • Report this Comment On May 18, 2013, at 1:33 PM, Iranian wrote:

    I'm from Iran, and must say that we are not happy for that and even or government.

    The responsible for that is American government that imposed sanctions against our country.

  • Report this Comment On May 18, 2013, at 1:33 PM, Iranian wrote:

    I'm from Iran, and must say that we are not happy for that and even our government. The responsible for that is American government that imposed sanctions against our country.

  • Report this Comment On May 18, 2013, at 3:17 PM, ifooluagain wrote:

    Iranians Also have to live WITH A DICTATORIAL GOVERNMENT who Whips, Burns. and mutilates Freedom LOVING cITIZENS. .. And, it is their Oil..

  • Report this Comment On May 18, 2013, at 4:55 PM, RobertLB1 wrote:

    What happens to oil prices when the world finds out that future electric vehicles will travel 20,000 miles without oil or a recharge? What happens to oil prices when the world finds out that homes and businesses in northern climates no longer need to purchase heating oil? The world might be worried about high oil prices, but high oil prices is what is needed to force the world into accepting new electric based technology that will save people thousands on their utility bills. US Government refuses to support this new technology because it will loose billions in daily tax revenue. This technology is coming with or without US Government supports. We will be ready for Iran and high oil prices, so bring on high oil prices. We will see how fast oil prices will fall once the world finds out there is a replacement for oil now.

  • Report this Comment On May 18, 2013, at 6:30 PM, Johnehton21 wrote:

    Stupid article. Iran's currency value has dropped almost 4 times because of sanctions and we expect no retaliation. We have limited their access to market and consequently the price has gone up and now we are blaming them for the prices hahaha

  • Report this Comment On May 18, 2013, at 8:07 PM, 4horseman wrote:

    Why does the USA have to beg for cheeper gas when all we have to do is ask Mexico to supply us with oil and at a very lowert price than Iran MMexico is just on the other side of our border whats the big deal or is it that we just love to beg Iran for oil let Iran put their oil where the sun don,t shine.or lets start drilling like there,s no tomorrow here in the good old USA.god knows we have more oil than Iran so lets start doing for AMERICA.

  • Report this Comment On May 18, 2013, at 8:23 PM, Riccardo18 wrote:

    The buffoon that wrote this article needs to learn a bit more about history..and this isn't even that far back. Do you recall that when gas went up to a MAX of $4.17/gallon, it cost $150/barrel?

    Ok do some simple math. The cost/barrel dropped significantly (33%) and the price of gas stays up there at just under $4.00/gallon.

    I'll paint this clear as day. You are not just a fool, but a freaking idiot if you think those countries are the ones benefiting from the $4.00/gallon pump prices. /endrant>

  • Report this Comment On May 18, 2013, at 9:21 PM, FarshadAP wrote:

    I can not believe the US is not able to control my country over this matter ! We thought the sanctions will work ! After a year, we came back to initial point... I hope this will not be start of something terrible between Iran & USA.

  • Report this Comment On May 18, 2013, at 9:40 PM, quasimodo007 wrote:

    what the difference from IRAN the evil GOP Congress and their mafia OIL corporations along with the Privilege Crooks of Wall Street Motto is GREED and Corruptions and THE GREAT American RIP OFF on the P OOR Americans Tax Payers

  • Report this Comment On May 19, 2013, at 4:04 PM, amvet wrote:

    Is the writer unaware that the US government is demanding that the world not buy Iranian oil?

    In addition the US demands other sanctions against Iran which cost normal Iranians great hardships including not being able to buy medicine.

    In view of this, for the writer to make fun of the Iranians should get him banned from fool boards.

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