Positive Effects of Sanction Relief
Following Iran’s nuclear agreement with P5+1 group, any restrictions on Iran’s petroleum industry would be lifted. Iran would be able to export crude oil, natural gas, condensate and petrochemicals without any restrictions.
Some analysts are wondering how long it would take Iran to regain its share of oil markets and return to its pre-sanctions position. Some others are asking how Iran’s return to oil market would affect the global supply and demand system.
To find answers to these questions, Iran Petroleum has interviewed Ali-Reza Yousefi, university professor specializing in international economics.
Q: Where does oil stand in the economy of Iran and other countries in the world?
A: There are currently three groups of oil exporters in the world. The first group comprised member states of the Organization of the Petroleum Exporting Countries (OPEC) with around 30 mb/d of oil exports. The second group is non-OPEC oil producers like Russia and Egypt and the third group consists of countries like China. The third group is neither OPEC nor non-OPEC, and is known as free countries. China is both buyer and exporter of oil and is subject to no specific law. It decides on its own about the price of oil, while it is the largest consumer of oil with 12 to 14 mb/d of consumption.
Iran is among the oil-rich countries in the region and its strategy is to follow the oil supply and demand market. In the 1970s, oil was a strategic commodity, but it is not any more. According to a survey by the Research Center of University of Tehran, the oil price was around $37 a barrel in 1976 and it has reached $60 after 37 years. During this period of time, the price of a commodity like maize has seen a 450-fold increase and maize is now a strategic commodity. Therefore, Iran would have gained 450 times more money had it invested in farmlands.
Q: How do you define the relationship between oil and Iran’s economy?
A: Following the 1953 coup against the Iranian government, the role of oil further came to the limelight in Iran’s economy. At the beginning, 40% of Iran’s economy was dependent on oil. In 1971, it was 65% and five years later it was around 88%. After the 1967 Iraq-Israel War, oil embargo against India, the US and Britain pushed oil prices up and Iran’s oil revenues rose accordingly. This trend remained unchanged after Iran’s revolution and the bulk of revenues needed for the administration of the country was provided by National Iranian Oil Company (NIOC).
In 1998, following an economic downturn in East Asia, oil prices sharply dropped to $9 a barrel. Iran’s government moved to make plans to wean the economy off oil revenues. Iran established the Supreme Council of Exports in that year. However, oil price hike in the following years made the economy dependent on oil once more. In 2006, under the 9th administration (Mahmoud Ahmadinejad), 81% of the country’s budget was based on petrodollars. Three years later, when the oil price was $147 a barrel, nearly 90% of Iran’s budget was dependent on oil.
Q: How have the sanctions affected Iran’s petroleum industry? How do you evaluate post-sanction conditions in Iran?
A: In recent years, Iran has been hit by four rounds of international sanctions imposed by the UN and 12 rounds of sanctions imposed by the European Union. In other words, two rounds of sanctions on average have been slapped on Iran every year. Iran’s oil, gas and petrochemical industries were targeted by 470 clauses in these resolutions. Now, in light of negotiations carried out by the 11th administration, there is high hope that the impacts of sanctions would be removed. These sanctions scared foreign investment away from Iran’s petroleum industry and oil production costs rose sharply. Meantime, Iran’s oil revenues were blocked abroad.
The way the sanctions are to be lifted is of high significance now. Over the past months, important measures were taken by Iran’s nuclear negotiating team in Geneva and Vienna. The lifting of all sanctions requires certain resolutions. I think that Iran is likely to face challenges over the removal of the sanctions. However, a good future is awaiting Iran’s petroleum industry after the removal of sanctions.
Q: After sanctions were imposed, Iran’s Ministry of Petroleum turned to domestic manufacturing. Over recent years, Iranian companies acquired special capabilities. What would happen to domestic manufacturing companies after sanctions are lifted?
A: The entry of foreign companies and their cooperation with domestic companies would improve the performance of Iranian companies. State-run companies like National Iranian Oil Company, National Iranian Gas Company and National Petrochemical Company have to offer more support for domestic companies and hire big as well as medium and small private companies in oil projects. In my view, the removal of sanctions is an opportunity for Iranian companies, because these companies would no longer have to deal with NIOC and they will jointly cooperate with foreign companies. That would help them boost the level of their technical knowhow.
Q: What do you think has caused oil price decline during the last two years? What are your projections?
A: The oil price fall in recent years has had political and economic reasons. Saudi Arabia and Kuwait cut the price of their exported oil in order to rival US shale production. The political aspect of oil price decline was aimed at harming Russia over the crisis in Ukraine. Global oil prices fell 55% in the past one year and Iran had to reduce its oil budget credit allocation ceiling. Now, Iran is supposed to derive 48% of its budget spending from non-oil resources. Oil revenues are likely to fall again in the future and the Persian Gulf states would face budget deficit. Bahrain, Kuwait, Qatar, the United Arab Emirates and even Saudi Arabia are already grappling with budget deficit. I personally believe that this oil crisis and the oil price crisis would seriously affect the economy of world countries in the future and the global economic growth will be slowed down. When oil price falls, oil revenues fall too and the main buyers, including EU, the US, Middle East and South Asia, will have to cut their purchases. That would slow down the economic growth of industrialized countries.
Q: How may Iran’s enhanced oil production affect global oil prices?
A: Today, oil has become a political product and not a strategic one. Even one barrel increase in production would cut prices. The International Monetary Fund (IMF) has announced the global economic growth rate at 4%. Greece, Albania, Hungary and Romania have announced their interest for exiting the euro zone. The EU is on the verge of collapse. Major economic crises are always created following a small challenge. In my view, an imminent crisis is escalating Iran’s economic stagnation. When global economic growth falls, oil consumption will also fall. Optimism puts oil prices between $50 and $60, while pessimism expects fresh fall in oil prices. We have to wait for a U-turn in oil prices. Under these circumstances, even if Iran decides to double its oil production oil prices would not be affected significantly.
Q: Which approach do you think Iran should adopt following the nuclear deal?
A: At first, Iran’s petroleum industry needs to be overhauled. It could not return to its pre-sanctions status in the world immediately after the sanctions are removed. I think that Iran’s petroleum industry should focus on the development of oil fields instead of focusing only on oil production hike because enhanced production would not produce good results now. I am opposed to enhanced production because the market is already oversupplied and the economic growth has been weakened. In my view, development and renovation of oil fields and investment in energy development are more important and NIOC should focus on this point. That would be taken into consideration by Ministry of Petroleum.
Q: What do you propose for Iran to get back its lost market share?
A: Iran’s petroleum industry should first focus on technology and modern procedures in order to be able to boost its power of competition in the future. At present, there is tight competition between countries for presence in global markets and Iran’s petroleum industry has to optimize its capabilities. In my view, NIOC should become more serious on marketing after the sanctions are lifted. It has to update its technology and technical knowhow and invest in marketing in order to find new markets and get back its lost market share.