The world is very connected. Given the right feedback loops, the flap of a butterfly's wings can cause a tornado half a world away. Oil affects nearly every part of our lives from powering our vehicles to being used to grow food. Any change in the price of oil has big implications on the economy and stock prices. According to economist James Hamilton, 10 out of the last 11 recessions have been associated with oil spikes . So with the news that President Obama and Iranian President Hassan Rouhani are talking for the first time in more than three decades , what does it mean for the price of oil and oil producers?
What an Iran open to the West means
First, if Iran opens to the West and cancels its nuclear program, it greatly reduces the probability that Iran blocks the Strait of Hormuz where 20% of the world's oil passes. If Iran were to block the strait, some analysts estimate that world oil prices would instantly increase 50%, causing a shock to the fragile economies of Europe and the BRIC nations. By reducing the probability of that black swan scenario, an open Iran means cheaper oil prices.
Secondly, an open Iran would mean more oil exported. According to data compiled by Bloomberg, Iran pumped 2.57 million barrels a day in August 2013 compared to 3.57 million barrels in August 2011 before US sanctions. According to Citigroup analyst Seth Kleinman, the reversal of sanctions would increase Iran's output by half a million barrels a day in a few months.
Finally, lifting sanctions would mean big opportunities for Western oil giants such as French oil giant Total (TTE 1.39%) and Royal Dutch Shell (RDS.A).
Both Total and Royal Dutch Shell have done business with Iran before, sometimes in defiance of US sanction threats. Royal Dutch Shell helped Iran develop the offshore oil fields of Soroosh and Nowrooz, while Total helped Iran develop the South Pars natural gas field.
Both companies are now jockeying for position once sanctions are lifted. According to the Wall Street Journal, Total exploration and production vice president for the Middle-East, Arnaud Breuillac, met the head of the National Iranian Oil Co., Rokneddin Javadi, earlier in October. Total has publicly stated that it is ready to help develop Iran's oil and gas fields once sanctions are lifted . According to The Telegraph, Royal Dutch Shell CEO Peter Voser has also echoed similar statements.
Schlumberger (SLB 0.67%) is another oil services company that may also benefit. No matter who does the drilling, those oil companies will likely need oil and natural gas services that Schlumberger has great expertise with.
Final thoughts
Iran and the United States are currently talking, but nothing is certain. United States has approached Iran about normalizing relations in 2009,but nothing has come out of it . If Iran does open to the West, the global price of oil will likely move lower, and Total and Royal Dutch Shell will likely see their bottom lines increase.
