Policy Changes Could Reduce World Price of Oil by 10 Percent and
 Increase U.S. Service Sector Exports

Washington, DC – If the United States lifted sanctions on Iran and the nation liberalized its economic regime, the world price of oil could fall by 10 percent and Iran’s gross domestic product (GDP) could increase by 23 percent annually, according to a new paper developed by economists Dean DeRosa and Gary Hufbauer. The paper, Normalization of Economic Relations: Consequences for Iran’s Economy and the United States, was commissioned by USA*Engage, and explores the effects of lifting U.S. sanctions on Iran and how such a shift in policy could impact the world economy, the U.S. and Iranian economies, U.S. multinational corporations, the international oil-and-gas sector, and the price of oil.

“With the support of its allies and the UN community, the United States maintains economic sanctions against Iran in response to Iran’s support for international terrorism, its pursuit of weapons of mass destruction, and more recently its practice of supplying arms to insurgents operating in Iraq,” wrote DeRosa, Principal Economist, ADR International Ltd., and Hufbauer, Reginald Jones Senior Fellow, Peterson Institute for International Economics. “As with all economic embargoes, the efficacy of the sanctions in forcing political change is controversial. In economic terms, however, both sides lose from the geopolitical standoff.”

The paper was written based on the assumption that U.S. sanctions currently in place are lifted, and Iran adopts more open policies toward foreign investment and expands other dimensions of its economy. “To generate significant economic gains, any normalization of Iran’s economic relations must entail dramatic changes beyond the lifting of U.S. sanctions. Iran must adopt policies that welcome foreign direct investment in its oil sector,” wrote the authors.

According to the report, the economic benefits to the United States, Iran and the broader international community associated with these policy changes include reducing the world price of crude petroleum by 10 percent, saving the United States annually between $38 billion and $76 billion. Liberalization of Iran’s economic regime could also result in an increase in Iran’s total trade by as much as $61 billion, adding 32 percent to its GDP, and an increase in U.S. non-oil trade and trade in services with Iran by about $46 billion, 0.4 percent of GDP.  The report added, “opening Iran’s market place to foreign investment could also be a boon to competitive U.S. multinational firms operating in a variety of manufacturing and service sectors.”
DeRosa and Hufbauer cautioned that unless both economic relations are normalized and policies are enacted to promote foreign investment, Iran’s energy sector may face challenges similar to those experienced by the Libyan and Venezuelan energy sectors in recent years. The paper points out that while President Bush in 2004 lifted the Iran and Libya Sanctions Act (ILSA) sanctions against Libya, “substantial new foreign investment by foreign oil companies, especially to develop the country’s potential for expanded production of natural gas, has not yet been achieved because of Libya’s antiquated infrastructure and highly regulated economy rife with corruption.”

In the case of Venezuela, though the country is not the object of current U.S. economic sanctions and until recently has attracted considerable direct investment from U.S. and other foreign oil companies, “the oil production and exploration rights of foreign oil companies have been sharply curtailed through a combination of new legislation, higher taxes and royalties, and new contractual arrangements. These measures effectively expropriate foreign rights and reduce the share of foreign companies in Venezuela’s oil energy sector.”

“We commissioned this paper, not to develop recommendations on if and how the United States should lift sanctions on Iran, but rather to illustrate the economic impact sanctions have on the global economy and specifically the international oil-and-gas and service sectors, which include many of our member companies,” said NFTC President and USA*Engage Co-Chair Bill Reinsch. “Broad unilateral sanctions intended to change the behavior of problematic regimes often miss that target, but do succeed in generating a number of significant economic consequences.”

For a full copy of the new report, please click here.

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USA*Engage (www.usaengage.org) is a coalition of small and large businesses, agriculture groups and trade associations working to seek alternatives to the proliferation of unilateral U.S. foreign policy sanctions and to promote the benefits of U.S. engagement abroad. Established in 1997 and organized under the National Foreign Trade Council (www.nftc.org), USA*Engage leads a campaign to inform policy-makers, opinion-leaders, and the public about the counterproductive nature of unilateral sanctions, the importance of exports and overseas investment for American competitiveness and jobs, and the role of American companies in promoting human rights and democracy world wide.

The National Foreign Trade Council (www.nftc.org) is a leading business organization advocating an open, rules-based global trading system. Founded in 1914 by a broad-based group of American companies, the NFTC now serves hundreds of member companies through its offices in Washington and New York.

There will be many conclusions to draw from the 2008 election, but voters in South Florida have made one thing clear – the political appeal of the Cuba embargo is nearing its end.

The next time a candidate for national office campaigns in South Florida, he or she will have to discard the well-worn hard line on Cuba policy and adopt a platform that addresses the concerns of an increasingly diverse community.

Cuban-Americans, like most Americans, would seem to care more about a candidate’s position on the economic-recovery plan these days than on the transition in Cuba. Recent polling suggests that large majorities of Cuban-Americans favor candidates who will prioritize housing and health care over transition in Cuba.

Hitting an anti-Castro note sounds off-key in a state that has the third-highest number of foreclosures in the country.

Beyond mere fatigue with the embargo, many Cuban-Americans also are having second thoughts about U.S. policy toward Cuba. Over the past eight years, the Bush administration has driven a wedge through the community by imposing new restrictions on the ability of U.S. residents to travel and send remittances to Cuba.

These policies have forced many Cuban-Americans who had reflexively supported the embargo to reconsider the impact that sanctions were having on their community and friends and family.

In Miami last month, I met a Cuban-American who changed his views on the embargo after traveling to the island with his father. He told me, “The Bush restrictions forced many in our community who blindly supported the hard line to stop and think, ‘Wait a minute. I’m anti-Castro. But are we doing the right thing?’”

Another said to me, “Cuba for my generation is not Fidel Castro. It’s the grandmother, the sister that you left behind.”

Those politicians who would cling to policies of extreme isolation hold an outdated view of their constituents.

Today, majorities of Cuban-Americans favor not only the rollback of Bush administration restrictions on travel and remittances, but also allowing unrestricted travel to Cuba by all Americans.

Large majorities of Cuban-Americans also favor diplomatic negotiations with Cuba and a dialogue that would include Cuban dissidents and representatives of the Cuban government. Even support for the embargo, an article of faith in South Florida for years, is rapidly eroding.

Fewer than 60 percent of Cuban-Americans support the embargo, according to a 2007 poll by Florida International University, compared with 66 percent in 2000 and 78 percent in 1997.

While the Cuban-American electorate – which trends older and more Republican than the broader community – historically has been among the most loyal supporters of the embargo, there is a growing center of voters and would-be voters emerging who care more about jobs, health care and visiting their family and friends in Cuba than Fidel Castro.

Excitement over Barack Obama’s candidacy, combined with concern about President Bush’s sanctions against Cuba and the state of the economy, are driving political participation among exactly the type of voters who are least likely to support current policy.

Tens of thousands of new Democrats made their voices heard in Miami-Dade County in this election, providing a tremendous boost to Democratic congressional candidates against incumbent Cuban-American Republicans that would have been unthinkable just a few years ago.

Statewide, Florida is becoming younger, more progressive and more Hispanic. The new voters that have been engaged in the political process are more likely to add to the voices challenging the conventional wisdom in South Florida and help to marginalize supporters of a policy of extreme isolation for years to come.

“There is a generational and economic shift,” Joe Garcia told me last month.

Mr. Garcia, who has mounted a strong Democratic challenge to Republican Rep. Mario Diaz-Balart in Florida’s 25th Congressional District, pointed to the U.S. economic crisis and anger over the restrictions on travel and remittances by Cuban-Americans as factors influencing voters in South Florida.

These changing demographics present a political opportunity for the next president, members of Congress and the candidates who seek to replace them to appeal to a community that is more diverse politically than it has been given credit for.

Responding to the frustration and, in some cases, resentment of the embargo as a political issue that has set in to much of the Cuban-American community would be a popular move.

In this age of permanent campaigns, there is no doubt that some political strategists are already looking at their 2010 calendars. They should take note: Relying on tough rhetoric and hard-line Cuba policies as an electoral strategy in Florida is over.

Jake Colvin is vice president with the National Foreign Trade Council and a fellow with the New Ideas Fund, where he is working on a project on U.S.-Cuba policy.