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Iran’s oil


February 11, 2016

The collapse of oil prices to levels unseen since the early 2000s has shaken markets and confidence in the health of major economies. Experts include the lifting of economic sanctions on Iran as a key factor in the dramatic fall. Yet, there is no consensus on this point.

In a recent paper, we quantify the global effects of this change in Iran’s trading opportunities, focusing on the countries that are likely to be most affected by the lifting of the oil embargo. The 2012 restrictions imposed by the European Union on Iran were the most far-reaching sanction as they curtailed the sales of Iran’s most important export commodity.

We also capture other components of the nuclear deal: the expected reduction in Iran’s trading costs and the liberalisation of cross-border trade in financial and transport services. The global effects of these two components are small as Iran accounts for a negligible share of the world’s non-oil trade.

Assuming that Iran is able to increase oil production and exports to the EU to pre-embargo levels, we estimate that the oil price will decline by 13 percent (or about $3 a barrel at current prices).

This decline implies losses for the net oil-exporting nations that are steepest for Opec members, especially the Gulf Cooperation Council states, which as a group loses nearly four percent in per capita welfare. The losses are due to the deterioration in their terms of trade.

As many of them subsidise oil, the lower oil price will have a compensating efficiency gain, but not enough to reverse the welfare loss. By contrast, oil-importing economies are expected to benefit – mostly because of improvements in their terms of trade, but also because cheaper oil enables expansion of industries that use crude oil and because in most of these countries oil use is taxed.

In percentage terms, the gains to the oil-importing countries are modest, mostly in the range of between a quarter and half a percent, but the world as a whole is better off as the gains to oil importers outweigh the losses to oil exporters.

As expected, the lifting of the economic sanctions is most beneficial to Iran, where per capita welfare is expected to rise by almost four percent. The gains are due to the expansion of oil production and exports and the liberalisation of cross-border trade in financial and transport services.

Importantly, the magnitude of the estimated oil price change suggests that the dramatic oil price drop observed since 2015 has little to do with the anticipated lifting of Iran’s oil embargo. Other factors have been driving down the price of oil.

Iran’s gains may be much more modest if Iranians are unable to increase oil production or oil exports to their pre-embargo levels. We estimate that a bounce back to just half of Iran’s pre-embargo oil exports to the EU is associated with per capita welfare gains of only three percent (oil prices will correspondingly decline by less).

Iran can get the most benefit from the lifting of sanctions by implementing reforms that improve the competitiveness of its economy.

For example, unilateral reductions of Iranian tariffs on imports of capital goods could add half a percentage point to the gains expected in the baseline scenario, as this reform enhances companies’ ability to upgrade their factories and import new technology.

Reforms in support of the recovery of the domestic car sector could increase per capita welfare in Iran by an additional 1.5 percentage points.

This article has been excerpted from: ‘Iran’s oil is for sale: who benefits, who loses?’


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