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By Richard Nephew
and Djavad Salehi-Isfahani
JULY 2 0 1 5
b | CHAPTER NAME
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IMPLICATIONS OF SUSTAINED
LOW OIL PRICES ON IRAN
*Richard Nephew is the Program Director for Economic Statecraft, Sanctions and Energy Markets at the Center on
Global Energy Policy. Prior to joining the Center in February 2015, Nephew served as Principal Deputy Coordinator
for Sanctions Policy at the Department of State, a position he assumed in February 2013. Nephew also served as the lead
sanctions expert for the U.S. team negotiating with Iran, and from May 2011 to January 2013, he was the Director for Iran
on the National Security Staff where he was responsible for managing a period of intense expansion of US sanctions on Iran.
Djavad Salehi-Isfahani is a Nonresident Senior Fellow at the Brookings Institution and a professor of economics at
Virginia Tech. He has served as Dubai Initiative and Kuwait Foundation fellow at the Belfer Center for Science and
International Affairs at Harvard Universitys John F. Kennedy School of Government. He has also served on the Board
of Trustees of the Economic Research Forum (2001-2006), a network of Middle East economists based in Cairo.
ACKNOWLEDGEMENTS
The author wishes to thank Bijan Khajehpour, Katherine Spector, Jason Bordoff, Matthew Robinson, and two
anonymous reviewers for their very helpful comments on earlier drafts.
This policy paper represents the research and views of the authors. It does not necessarily represent the views of
the Center on Global Energy Policy.
This paper may be subject to further revision.
EXECUTIVE SUMMARY
INTRODUCTION
Distortions are present in the oil industries of many
major petroleum exporting countries. However, perhaps
no other country has as many different factors at play
in its oil sector as Iran. Even prior to the imposition
of international sanctions against it, Iran managed
its oil production in different ways than others and in
response to a complex history of foreign concessions,
nationalization, and, ultimately, popular uprising. With
international sanctions, Irans oil sector operates under
constraints that make it even more difficult to discern
precisely what will happen in response to individual
stimuli and, in particular, what the implications would be
of a major, sustained reduction in oil prices. Moreover,
with international sanctions presently the subject of
negotiations between Iran and members of the P5+1
(China, France, Germany, Russia, the United Kingdom
and the United States), it is possible that these sanctions
might soon be modified, reduced, or terminated
altogether.
Taking these various factors into account, this assessment
has formed the following conclusions about Irans oil
economy under a low-price scenario:
A
lthough a drop in oil prices naturally affects Iran
like any other oil supplier, the effects are distorted
by virtue of the international sanctions regime in
place against it.
T
he decline in Irans oil exports, as well as its limited
access to the revenue of its oil sales since 2012,
have, in effect, acted like a major price reduction
in terms of Irans near-term ability to utilize its oil
revenues. For example, imports in 2014 were down
by 23 percent compared to 2012. As such, Iran
experienced the oil-price shock that is only now
being confronted by other oil producers as early as
three years ago.
o U
nder P5+1 and Irans Joint Plan of Action
(JPOA), Iran only has access to $700 million
per month of its oil revenues held abroad.
o U
nder US sanctions, and with the exception
of the aforementioned $700 million, banks
holding Irans oil revenues in China, India,
Japan, Korea, Taiwan, and Turkey have
prevented these revenues from being used or
4 | CENTER ON GLOBAL ENERGY POLICY | COLUMBIA SIPA
5
4
3
2
2013
2011
2009
2007
2005
2003
2001
1999
1997
1995
1993
1991
1989
1987
1985
1983
1981
1979
1977
1975
1973
1971
1969
1967
1965
3.5
3.0
30000
ER
25000
Inflation
2.5
2.0
20000
1.5
15000
1.0
10000
2014/15
2013/14
2012/13
2011/12
2010/11
2009/10
2008/09
0.0
2007/08
2006/07
0.5
2005/06
5000
Rials/$
35000
Source: Central Bank of Iran. Inflation is a twelve-month moving average, and the exchange rate is the
free-market rate.
Total
-31.5
0.9
20.3
Current
Development
-22.3
-59.6
-0.2
7.3
11.6
67.6
Table 2: Comparing the Income Effect of Oil Price Versus Oil Reductions
$20/barrel
$20 million
per day
$25 million
$30 million
$35 million
$40 million
$40/barrel
$60/barrel
$80/barrel
$100/barrel
$40 million
$60 million
$80 million
$100 million
$50 million
$60 million
$70 million
$80 million
$75 million
$90 million
$105 million
$120 million
$100 million
$120 million
$140 million
$160 million
$125 million
$150 million
$175 million
$200 million
The last few years have put Iran well behind its own goals
as envisaged in the twenty-year strategic plan issued as a
decree in 2005. Even growing at the East Asian rates of 8
percent per year would not be enough to fulfill the plans
lofty goals. But growth at more than 5 percent would at
least begin to reduce unemployment and with luck bring
the unemployment rate for youth to single digits. Much
more than high oil prices is needed to grow at rates higher
than 5 percent, including:
I nvestment in infrastructure: Iran has a decent
infrastructure of roads, transportation, and ports,
and its supply infrastructure for electricity and
natural gas domestically is well developed. The
weakest part of Irans infrastructure is its access to
the Internet, though at this point the impediments
to raising Internet speed and accessibility are
primarily legal and ideological rather than financial.
P
rivatization: The government owns and operates
some 50 percent of Irans enterprises. Instead of
leading enterprises to pull the rest of the economy
forward, the governments enterprises are a heavy
drain on public resources and a drag on private
investment. Attempts to privatize in the last two
decades have been one failure after another, from
sham privatizationselling large enterprises to
IF SANCTIONS REMAIN
For the economy as a whole, replacing lost oil revenues is
much more difficult and would depend greatly on Irans
ability to access the global financial and trading system.
Absent a comprehensive nuclear agreement, sanctions
would likely tighten on Iran. This would make it hard to
maintain the positive-expectations equilibrium that has
allowed the economy to grow by about 3 percent since
Rouhani took office. In addition, as noted earlier, the
ability of Iranian producers to obtain new technologies
and source critical input would be limited, resulting in
further economic contraction.
In such a scenario, the value of the rial, which has
remarkably stayed constant in the last two years, would
drop. In the last two years, capital flight has been kept in
check (or may have even reversed) thanks to a combination
of high expectations in Iran for a compromise at the
nuclear table, high interest rates, and natural fear about
the loss of access to capital held abroad in the future.
After being in the negative range for several years during
the Ahmadinejad era, interest rates are now some of the
highest in the world, about 7 percent in real terms.
CONCLUSION
The impact of the oil price drop on Iran is distinctly
different from that felt by other major oil producers
because of the impact of sanctions. As such, Iran
experienced some of the effects of the price drop
almost three years ago, which are only now becoming
problems for other oil-producing states, and has taken
steps to address them. Both reduced export volumes
under sanctions and low oil prices cripple foreignexchange revenues, but sanctions are more damaging to
the economy because they reduce Irans ability to spend
its foreign-exchange earnings effectively and to import
technologies that help the economy adjust to lower oil
prices.
President Rouhani has called for reforms of national
budgets and infrastructure priorities, in part as a response
to the economic impact of oil sanctions. But, ultimately,
while he has rationalized some of Irans economic
decisions, absent sanctions relief, his ability to restore the
Iranian economy will be seriously curtailed. Increased oil
prices would help the Iranian economy more generally to
compensate for the problems created by sanctions but
would not be sufficient to solve the systems problems
without major, long-term retooling of the Iranian
economy, something hard to achieve without access to
oil revenues in the first place.
NOTES
1
Maloney, S., The Revolutionary Economy, Iran
Primer, US Institute of Peace, http://iranprimer.usip.
org/resource/revolutionary-economy.
2
Iran Overview, World Bank, last modified 1
March
2015, http://www.worldbank.org/en/
country/iran/overview.
3
T henTreasury undersecretary David Cohen testified to the US Senate Foreign Relations Committee on 21 January 2015, that this remains the
case. United States Senate Committee on Foreign
Relations, Written Testimony of David S. Cohen,
21 January 2015, http://www.foreign.senate.gov/
imo/media/doc/Cohen_Testimony1.pdf.
4
Fineren, D. and George, M., Iran Sees Limited Improvement in Oil Exports Next Year,
Reuters, 3 December 2013, http://uk.reuters.
com/article/2013/12/03/uk-iran-oil-idUKBRE9B20RD20131203.