17 February 2016

The Strategic Impact of Iran’s Rising Petroleum Exports After Sanctions

FEB 15, 2016

The decades since the first major oil embargo in 1973 have shown all too clearly that no one can predict oil and gas prices and petroleum export revenues. This is particularly true when oil supply is so high, key exporters like Iraq and Libya are at war, production is partly driven by the tensions between Iran and its Arab neighbors, new sources of production are coming on line, and the world seems be headed for a China-driven collapse in the growth of petroleum demand.

There are important new estimates from the U.S. Energy Information Administration (EIA), World Bank, and the International Monetary Fund (IMF), however, that indicate that Iran is not going to see the kind of windfall from the lifting of sanctions as a result of the Joint Comprehensive Plan of Action (JCPOA) nuclear agreement and the lifting of sanctions that some expected at the time the agreement was signed.

Iran’s petroleum exports will increase, but they will do so at a time when oil and gas prices are far lower than at the time when sanctions became truly effective, and when they are far lower than most experts predicted at the time the JCPOA was negotiated and signed.

Many of the estimates of Iran’s gains also assume that Iran will make major internal economic reforms – reforms for which many in Iran’s regime have long recognized the need, but have been unable to actually make. This is a critical issue because most estimates of the gains Iran will get from lifting sanctions are more dependent on the ability to use higher petroleum revenues to catalyze the overall growth of the Iranian economy than on the increase in export revenues per se.

The differences between Iran’s security-oriented hardliners and the more moderate figures that emphasize internal stability and economic growth present a further uncertainty, as does the priority given to funding and developing the state sector rather than allowing Iran’s private sector and outside investment to benefit. There are many in Iran who do give priority to development and to the private sector as a key element in economic growth, but the Supreme Leader, hard-line politicians and clergy, and key elements of the Islamic Revolutionary Guards Corp and intelligence services give priority to investment in security and military forces.

The rising level of tension and violence in the region, as well as external factors, adds to this level of uncertainty. Iran’s rising rivalry with Saudi Arabia is occurring at time when the Organization of the Petroleum Exporting Countries (OPEC) has proven to be extremely weak, and Saudi Arabia has little incentive to cut back on production unless other states like Iran and Russia do so, and the net impact is a serious rise in Saudi Arabia’s real export revenues. At the same time, the slow down in China’s economic growth and demand for all commodities – including petroleum – now seems likely to last for at least several years, driven in part by rising Chinese costs and the lack of economic growth and demand for imports by other states.

These issues are analyzed in depth in a new Burke Chair study calledThe Strategic Impact of Iran’s Rising Petroleum Exports After Sanctions. This study is available on the CSIS web site athttp://csis.org/files/publication/160215_Iranian Petroleum_after_JCPOA.pdf

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