Iran Oil Sector's Unique Advantage

Professor of Economics
Iran Oil Sector's  Unique AdvantageIran Oil Sector's  Unique Advantage

The Cabinet approved a new model for oil contracts on Wednesday. Many hope that this new model would pave the way for foreign investment in Iran’s oil sector.

The question is whether this industry can attract investment when oil prices are at a new low equilibrium. The answer is yes.

By reviewing global oil market, it is not difficult to notice a new equilibrium. It is true that in 2014, the oil market witnessed a sharp decline in oil prices, but that was two years ago.

In the fast-paced global economy of 2016, economies and businesses have already adjusted their expectations. The investment market has moved to a new equilibrium, where investors make their decisions based on adjusted expectations.

This is good news for Iran’s oil industry because it means it can offer investment contracts using the existing price signals without fear of distortion or market interruptions.      

It is true that Brexit interrupted the oil price rise by adding to the uncertainty. Markets fear the economic consequences of the world’s fifth largest economy exiting European Union.

Prior to Brexit, oil prices were increasing. In June 2016, the monthly average spot price of Brent crude oil registered another $2/b increase reaching $48/b. This price was the highest monthly average for Brent since fall 2015. However, oil prices have not dropped dramatically since Brexit. Oil investors did not panic.

Iran’s oil industry benefits from this stability in oil markets to highlight its biggest advantage. While other members of the Organization of Petroleum Exporting Countries have saturated their markets, Iran can still expand exports.

In the post-JCPOA era, as sanctions are lifted, Iran’s oil exports increase. The country has very little foreign debt, making it one of the healthiest economies present in the global financial market in that regard.

As its oil exports increase, its oil revenues also increase despite falling oil prices—an ironic fact not lost on foreign investors.

Reuters reported that Iran’s oil exports to its four major buyers in Asia have increased by 47.1% in June 2016 compared to June 2015. There is little doubt that Iran has successfully recouped its market share.

Recently, it was announced that Japan’s oil imports from Iran have doubled during the same period. The market supports the claim that Iran’s oil industry may be able to promise better than average return on investment by simply returning to its old markets. Its performance in the last 12 months provides strong evidence to support this claim.

Thus, introducing the new model for oil contracts is a step in the right direction. It clarifies the new expectations and offers a framework for foreign investment in the oil sector.

Given the competition in the market, it will not be easy to attract foreign investors. Realistically, it might take up to a year before any foreign investment takes place and becomes available.

However, it is fair to say Iran has more than a fighting chance. In an oil market with no immediate price increase in sight, Iran offers the only oil industry with a viable promise of increasing revenues and thus better returns. That is something any investor would consider seriously.

Ali Dadpay is a lecturer in St. Edward’s University