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Reports Geopolitics

Implications of Sustained Low Oil Prices on Iran

In light of pending negotiations between Iran and the P5+1 we thought you would be interested in the latest issue brief from the Center on Global Energy Policy on the relative impact of low oil prices compared to sanctions on Iran’s economy. In it, co-authors Richard Nephew, the Center’s Program Director for Economic Statecraft, Sanctions and Energy Markets, and Djavad Salehi-Isfahani, a Nonresident Senior Fellow at the Brookings Institution and a Professor of Economics at Virginia Tech, find that sanctions relief is essential to Iranian economic recovery, even more so than a rebound in the price of oil. The executive summary of the issue brief is below and the full document is available here (PDF).


Implications of Sustained Low Oil Prices on Iran (PDF)
Richard Nephew and Djavad Salehi-Isfahani
July 2015

Unlike many other major petroleum exporting countries, the drop in oil prices since mid-2014 has affected the Iranian economy modestly, at least in comparison to the international sanctions regime in place against Tehran. The sanctions regime imposed against Iran three years ago created the sort of massive shock for the Iranian economy that is being faced now by other oil-producing states. The oil price drop was, therefore, a second, lesser issue for Iran that—for all of its effects—is less of a fundamental problem for the Iranian economy than the sanctions imposed against it.

Iran’s limited access to the revenue from its oil sales since February 2013 acted, in effect, like a major price reduction. Under US sanctions, banks holding Iran’s oil revenues in China, India, Japan, Korea, Taiwan, and Turkey have prevented these revenues from being used or transferred, other than in support of bilateral trade or for the purchase of humanitarian goods. This situation has not improved through P5+1 (China, France, Germany, Russia, the United Kingdom, and the United States) and Iran’s Joint Plan of Action (JPOA), under which Iran only has access to $700 million of its oil revenues held abroad per month. Iran’s imports have shifted to favor its remaining oil customers but still has not equaled the amount of money that Iran has earned through oil sales to them. The result has been an accretion of revenues in restricted accounts in those six customers’ banks and a requirement for Iran to plan as if these revenues are largely inaccessible.

In response to this first fundamental shock, Iran has already begun undertaking the appropriate policy response. First, Iranians elected Hassan Rouhani to the presidency in June 2013, in part in response to his campaign promises to right the Iranian economic ship. Through his election, a coterie of technocrats—last in office under President Khatami (1997–2005)—has returned to power in Tehran, bringing with them a more rational economic approach and policies. This has included but is not limited to efforts to change the manner in which Iran spends national  revenue, reduce Iran’s dependence on the availability of oil revenues, and address problems of government-related corruption. Given vastly improved management over the last administration, Rouhani’s government is consistently posting better numbers regarding inflation and economic growth, although job creation and unemployment reduction remain more difficult hurdles to overcome.

The authors conclude that President Rouhani’s longterm plans for Iran’s economy, however,  hinge on sanctions being removed. Iran could benefit from diversifying away from dependence on oil for export revenue, but sanctions have also limited Iran’s ability to obtain support and materiel necessary to create viable, nonoil export sectors. If sanctions were to remain in place, Iran could benefit from higher oil prices and from changing its approach to domestic fuel subsidies to permit the government to collect revenues from internal consumption. But without sanctions relief, Iran will not be able to achieve its goals of increasing employment and bringing inflation down further and bringing the country’s overall growth trajectory closer to its potential. Sanctions simply create too many problems and impair Iran’s ability to undertake policy adjustments to address its broader economic challenges.

Download and read the full issue brief here (PDF)


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Implications of Sustained Low Oil Prices on Iran