The Impact of Sanctions on Iran’s Energy Sector

The recent withdrawal of the United States from the multilateral Iran Nuclear deal (commonly known as JCPOA) reimposes American sanctions on the purchase of Iranian oil and natural gas. The decision from the Trump administration will have wide-reaching effects on everyone from bankers and insurers to international shipping companies and traders. These sanctions, the latest in a long series of Western punitive measures since the Iranian Revolution in 1979, attempt to induce enough discontent and push the Khomeini regime to reach a “threshold of pain” that will force national policy to comply with international rules. As Iran seeks to maintain economic relations with the world through its oil and gas exports, the fate of the energy sector has become entangled with sanctions.

In a recent paper, Tamas Dudlak of Corvinus University of Budapest examines the impact of these sanctions on the Iranian energy sector. He does this by first conducting an analysis of financial, legal, and economic frameworks of investment in Iran. Through his analyses, Dudlak finds that the isolation of Iran from the global political and economic community likely catalyzed the Iranian regime’s move to a centralized state in “defense” of the population. That is, the government merged the idea of its own stability with the economic health of the country. Then, the Iranian people reacted to the external threat of economic deprivation by increasing their loyalty to the incumbent leadership, reinforcing a wave of anti-Western sentiment. Consequently, in the course of centralizing state power, hydrocarbon management in Iran has been increasingly dominated by government and military loyalists, thus guaranteeing the regime’s safety, a phenomenon Dudlak dubs “resource nationalism.” Ultimately, Dudlak finds, Western sanctions may have yielded a regressive energy policy in Iran that is triggered by prolonged global isolation.

Furthermore, the author analyzed policy actions. In doing so, he first found that resource nationalism has undermined institutions such as the Ministry of Energy and the Supreme Energy Council, as their authority has crumbled and degraded trust among potential trade partners. Second, the author found that the system of domestic subsidies for oil, gas, and electricity has grown to be the largest in the world, surpassing those of Saudi Arabia, Russia, and Venezuela. Despite the Iranian regime’s underlying populist rhetoric, the country’s rising cost of living has meant that the benefits of the subsidy scheme have been disproportionately for the urban rich who can afford electric appliances, air conditioning, and cars. Not only have the sanctions sapped income from oil exports over the years and stunted Iran’s realization of its natural gas potential, but the author also found that this non-productive subsidy scheme depleted surpluses from upsurges in global prices that could have been potential investment capital into the industry.

Finally, the author noted the importance of Iranian President Hassan Rouhani taking power in 2013. He quickly initiated reform, including bringing energy prices up to market rate, thus reducing the burden on the central budget and a focus on involving the private sector in hydrocarbon management to counter overwhelming military power. Coupled with the relaxing of American sanctions in 2016, President Rouhani’s policies attracted a range of European and Asian oil companies to initiate business agreements with Iran. Dudlak’s assessment is that Iran was showing signs of pushing the industry to a more economically-sustainable direction. The author thus concludes that the American withdrawal from the Iran nuclear deal puts that development into question.

Given that European and Asian oil companies are hard at work to bypass the sanctions and uphold newly-minted contracts with Iran, these new sanctions may not relegate Iran’s energy industry back to its pre-2016 state. However, Dudlak’s evaluation indicates that Iran’s rivals, led by Saudi Arabia, stand to improve their respective global energy standings as sanctions continue to create uncertainty in Iran.

Article source: Dudlak, Tamas, “After the sanctions: Policy Challenges in transition to a new political economy of the Iranian oil and gas sector,” Energy Policy Vol. 121 (2018).

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