Low oil prices: Help or hindrance for the P5+1 and Iran?
previous analysis, economic sanctions have already partially impaired the relationship between oil prices and Iran’s macroeconomic outlook. However, it’s also possible that the fact that Iran has already been forced to make significant fiscal and monetary adjustments to cope with lower energy revenues could give it some resilience to a downside oil prices shock, particularly in the short-term. In either case, we can assume the following:
- Iran will be more aggressive towards relief of sanctions that do not target its energy sector, in order to revitalize other parts of its economy. Iran has been undergoing structural reforms to make its investment climate more business-friendly, and aims to develop greater economic diversity away from pure reliance on oil export revenue.
- Estimates from Roubini Global Economics suggest that the return to the implementation of sanctions present before the Joint Plan of Action (JPOA) would mostly erase the economic growth Iran has experienced in the last 12 months (with an estimated economic expansion of 2.5% y-o-y versus sharply negative growth in 2012/13).
- New sanctions such as those pending in congress would likely lead to a recession, as Iran’s oil output falls and the government has to make fiscal cuts to balance the budget. Thus, Iran has greater incentive to avoid total collapse of negotiations and reinstatement of tighter sanctions on its energy sector, to avoid exacerbating current shortfalls in oil revenue
- Lower oil prices also create divergent tactics for the P5+1. Historically, concern over a global spike in oil prices has been a major factor inhibiting sanctions that would fully remove Iran’s oil exports from the market. With this concern all but completely alleviated, the West, and particularly the United States, is truly in a position to take an aggressive stance towards negotiations.
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