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.
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.