Jan 18, 2016

Economic Sanctions Against Iran

Economic Sanctions Against Iran

Iran: Lifting of Sanctions Will Lower Oil Prices and Boost Domestic Economy If Managed Well

The end of economic sanctions against Iran could shake up oil markets.

U.S. and European Union sanctions on Tehran were finally lifted on Saturday (16/01/2016), restoring Iran’s access to world’s markets. Iran has been gearing up for this moment for months and could soon return to the top ranks of global oil producers.

Crude prices have been tanking for months, dropping to below $30 a barrel. A flood of new oil from Iran will likely push them even lower very soon.

Analysts expect Iran to add between 600,000 and one million barrels per day to its oil output, but the country’s leaders are much more bullish.

Iran is aiming to increase output by close to 1.5 million barrels by the end of 2016, taking daily production to 4.2 million according to Iran’s oil minister Bijan Zanganeh.

Tehran is in a tricky position. The more oil it exports, the more likely prices will drop even more. Iran has relatively low production costs compared to other countries, but another slump in prices would put its plans at risk. The country desperately needs heavy investments in its out-of-date oil infrastructure.

Iran is a member of the oil organization OPEC. Just few years ago, OPEC countries would adjust their production to keep prices in check, but it’s unlikely the group will do something like that now. The U.S. shale boom has forced OPEC to change its strategy and step up production to defend its market share.

Lifting sanctions related to Iran’s nuclear program will have a significant impact on the world oil market, the Iranian economy and Iran’s trading partners. Iran’s full return to the global market will eventually add about a million barrels of oil a day, lowering oil prices by US$10 per barrel next year, according to the World Bank, which also expects economic growth in the country to surge to about 5% in 2016 from 3% in 2015.

The World Bank’s Middle East North Africa (MENA) Quarterly Economic Brief, Economic Implications of Lifting Sanctions on Iran, sees Iran’s capacity to export more oil as speeding its economic recovery. But the report projects lower export earnings and revenue for MENA’s other oil exporters, such as the Gulf States and Libya, while oil importers in the region, such as Egypt and Tunisia, will benefit from lower world prices.

Iran’s cost of doing trade will also fall, increasing not just the volume but the value of its oil trade and non-oil trade. The Bank’s report estimates that exports from Iran will eventually increase, too, by about US$17 billion, which is about 3.5% of its GDP. Britain, China, India, Turkey and Saudi Arabia are among the countries most likely to see the largest rise in post-sanctions trade with Iran. Foreign direct investment may increase to about US$3 billion a year, double the current rate but still lower than its peak in 2003.

The lifting of sanctions represents an economic windfall to the Iranian economy. Iran’s experience with managing previous oil windfalls is sobering. The real exchange rate appreciated undermining non-oil exports. Governments facing such economic windfalls have the opportunity to put in place a policy framework that puts the economy on a path of sustained growth.

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