Table of Contents
Title: ........................................................................................................................................... 3
Abstract: ..................................................................................................................................... 3
1.
Introduction: ....................................................................................................................... 3
1.
Research Rationale: ........................................................................................................... 4
2.
Research Aim: .................................................................................................................... 5
3.
Research Questions: ........................................................................................................... 5
4.
Research Methodology: ..................................................................................................... 6
5.1.
Introduction: ................................................................................................................ 6
5.2.
Research Approach: .................................................................................................... 6
5.3.
Research Strategy: ....................................................................................................... 6
5.4.
Data Analysis Method: ................................................................................................ 7
5.5.
Limitation on collection of data: ................................................................................. 7
5.
Hypothesis of the research: ................................................................................................ 7
7.
Literature Review: ............................................................................................................. 7
7.1.
Oil and Gas Industry: .................................................................................................. 7
7.2.
Importance of Oil and Gas: ......................................................................................... 7
7.3.
Oil and Gas price fluctuation in recent years: ............................................................. 8
7.4.
Reasons for Oil and Gas price changing: .................................................................... 9
7.4.1.
Internal Factors: ................................................................................................... 9
7.4.2.
External Factors: .................................................................................................. 9
7.5.
Lifting international sanction on Iran: ....................................................................... 10
7.6.
So what is international sanction on Iran and its impacts? ....................................... 10
7.7.
Lifting of this international Sanction on Iran: ........................................................... 12
7.8.
Why International Sanction on Iran could impact Oil and Gas industry and petroleum
prices? .................................................................................................................................. 12
Summary of Literature Review:............................................................................................... 13
8.
Result and Discussion: ..................................................................................................... 13
8.1.
History of Iranian Oil Industry and its dominance in the world: .............................. 13
8.2.
Importance of Oil Industry of Iran to Iranian government and people – before
International sanction: .......................................................................................................... 14
8.3.
Oil and Gas Price – before Iranian Revolution of 1979: ........................................... 14
8.4.
Iranian Revolution in 1978-1979 and its impact on Oil Production of Iran: ............ 15
8.5.
Impact of Iranian Revolution on Oil Price: ............................................................... 15
8.6.
Iran recovers its oil production – post Iranian revolution: ........................................ 15
8.7.
Iran-Iraq War 1980-1988 and its impact on Iran’s Oil Production: .......................... 16
8.8.
International Sanction on Iran: .................................................................................. 16
8.8.1.
United States Sanction on Iran and its Impact on Oil Industry in Iran: ............. 16
8.8.2.
European Union sanction on Iran and its impact on oil industry in Iran: .......... 17
8.9.
More Detail look on the impact of these international sanctions on Oil Industries in
Iran: 18
8.9.1.
Iranian Oil Embargo: ......................................................................................... 19
8.9.2.
Iran was prohibited to transport oil and other goods: ........................................ 19
8.9.3.
Investment on Oil and Gas production in Iran was prohibited: ......................... 20
8.9.4.
Iran had restricted access to its oil revenues: ..................................................... 20
8.10.
Iran Oil and Gas Industry – Post international Sanction: ...................................... 20
8.11.
Oil Prices – Post International Sanction: ............................................................... 21
8.12.
Opportunities for foreign Investment in Iran – Post Sanction: .............................. 21
8.13.
Challenges that Iran would Face – Post International Sanction: ........................... 21
8.14.
Comparison of Oil Prices before and after various events evolving around Iran:. 22
8.15.
Analysis of Oil Price changing during and after those events: .............................. 25
8.16.
Summary:............................................................................................................... 26
9.
10.
Conclusion ....................................................................................................................... 28
References ..................................................................................................................... 30
Title:
Analysis of before and after effects on Oil and Gas Industry of Lifting
International Sanction on Iran
Abstract:
This research is based on historical events in and surrounding Iran and its impacts on oil and
gas production and the change of prices depending on them. This research tries to detail out
those historical events and its effects on oil and gas production and prices. Iran being one of
the biggest oil reserve holder it always had its say and its impact on the oil industry. So any
effect on Iran would definitely has big or small impact on the oil market and within the country.
International sanction blocked Iran’s oil and gas production and export and limited Iran. It was
really unfortunate for Iran to go through these various historical and political events in such a
short period. From Iranian revolution, Iran – Iraq war to United States sanction law, European
Union sanction law and United Nations sanction law against Iran took Iran’s oil production,
transportation and export to reduce significantly. This had significant effect on oil price around
the globe. Some of these had smaller impact but some of them had very significant impact on
the oil and gas prices around the world.
1. Introduction:
Oil and Gas are something very important to people. In today’s generation, a world without
oil and gas cannot be imagined. Oil/gas powers 100 per cent of all transportation, contains a
few substantial figures of rounding error. Transportation straight accounted for 1/6th of world
GDP in the year of 1997 and it is greatly involved in all other type of economic activity. Apart
from a very small number of electric-powered vehicles, it is impossible for a person to move
anything anywhere faster than about 25 mph without oil (Forbes, 2013). Most of the things
without oil seems impossible for now.
Thus, Oil and Gas can be considered to be a wealth for countries that produce them. The reason
for this is simple. Better sources of energy increase production of any industry and helps to
reduce the negative factors. Supply of energy can impact and industry and any production
seriously. Cheap and ample energy lifts nations out of poverty. In other hand, failure to secure
energy supplies dooms nations to downfall. Thus, oil and gas production means money and
wealth for the country.
Iran is one of the country that produces oil and gas. Its oil and gas industry dates back to the
early 20th century, making it the oldest in the Middle East. Anglo-Persian Oil Company
(APOC), which is now known as BP, was formed in Iran with its task being extraction and
marketing of the oil produced in the southwestern region (The Gulf Intelligence, 2016).
Iran has one of the world’s greatest mature oil sectors and the energy infrastructure that has
been built up with more than 100 years of experience in this industry. In today’s date Iran’s
conservative proved oil reserves stand at 157 billion barrels. This country now has 9 refineries,
oil terminals, extensive pipeline networks, and ports along the Gulf coast, and a large
petrochemicals industry (The Gulf Intelligence, 2016).
The United States, United Nations, and European Union imposed multiple sanctions on Iran
for its nuclear program since the International Atomic Energy Association (IAEA) in
September 2005. This sanction isolated Iran from the world market and blocked its oil exports.
Up to the year 2012, oil and gas exports produced half the Iranian government's revenue and
making one-fifth of the country's GDP; but with international sanction, Iran’s oil and gas
exports have been more than halved since (Laub, 2015).
1. Research Rationale:
This research is done to figure out what are the impacts of international sanction of a country
like Iran whose main export of oil and gas was blocked. The research helps to figure out what
kind of impact would this make to government of the country and what kind of impact it would
make to the price of oil and gas.
Oil and Gas industry is a source of wealth and money for any country which produces it. It is
the only reason for gulf countries to be as wealthy as they currently are. As 1/6 th of world’s
GDP is formed from this industry, it is easily understandable that selling oil and gas is a very
big deal for any country (Iran Chamber Society, 2012). Blocking a country from selling this in
international market can set a big drawback to the country’s economy, government and
population. This research would study these impacts.
Apart from international sanction, this research will also focus on how wars and revolution also
impacts a country and its economy. With Iran having Islamic revolution, then war with Iran, it
would have definitely impacted on the economy of Iran and Oil and Gas price around the world.
These also would have severe effect on its oil and gas industry as well.
This research needs to be done as oil and gas market is one of the biggest market in the world
and Iran being one of the oldest producer of oil and gas, its impacts before and after the
international sanction has to be read and addressed. This research would show countries, both
implying and the one on which it is implied, how bad or good international sanction can be for
companies such as oil and gas industries, economy, population and government of the country
and why it should be encouraged or discouraged.
2. Research Aim:
The main aim of this research is to study the before and after impact of international sanction
on Iran and oil and gas price around the world.
3. Research Questions:
In order to fulfil the aim of this research, the following questions needs to be answer. Thus, the
question, this research will be based on are:
1. How did the 1979 Islamic revolution in Iran impact its industries?
2. What were the effects of the 8-year war between Iran and Iraq?
3. What was the impact of international sanctions in Iran which started after the revolution
till present time 1979-2016 (until is lifting)?
4. What were the effect of this sanctions on the government?
5. What were the effect of sanctions on the oil and gas prices?
6. How historical events in Iran impacted oil and gas price?
7. What are the challenges Iran face after the lifting of Sanction?
8. What foreign investment opportunities are there in Iran?
4. Research Methodology:
5.1.
Introduction:
Research methodology is a methodical exploration which helps to form proofs or philosophies
or to gather information regarding a subject. It is a way used to recognise and redefine the
problem of the investigation. This process aids to formulate hypothesis and propose appropriate
resolutions for the problem found. It allows to gather, unite and assess the data from the method
research. Research Methodology also helps in deduction of the scope and helps to reach a final
conclusion. Then, it also allows to test all the conclusions of the research.
5.2.
Research Approach:
The research that is to be done for the gather and study the impact of sanction on Iran would
be done using inductive approach. Inductive approach helps moving from precise observations
to wider generalizations and theories.
This research would find the impact of sanction on the economic, politics and public of Iran.
This research will help to generalise these impacts so before imposing this kind sanction to any
country by UN or other organisation could look at these and make a decision.
5.3.
Research Strategy:
The research that will be done for impact of international sanction on Iran oil and gas
production and oil and gas price around the world will be an analytical research. The details
and information that are previously available would be analysed and critical evaluation
deduction from these would be done.
5.4.
Data Collection Method:
Data collection would be done by reading different books, website and journals. The data will
be filtered and sampled. Various data from web and journal can be very impactful and
important. This data will then be put together to generalise the impacts.
5.5.
Data Analysis Method:
Data analysis method for this research would be Qualitative data analysis. This means is used
to analyse the data that has been collected from above data collection method. This data will
then be filtered and proper generalisation could be done.
5.6.
Limitation regarding collection of data:
Collection of some valuable data might not be possible to the fullest. Since, the research will
be based on journal, documents, book and web, they might not have addressed some of the key
impacts and effects of sanction. Also, lifting of international sanction on Iran is a very new so
the contents available might not be enough.
5. Hypothesis of the research:
Lifting on International Sanction on Iran would play a major role in the change of Oil and Gas
price.
7. Literature Review:
7.1. Oil and Gas Industry:
Oil and Gas Industry or the petroleum industry comprises the universal methods of exploration,
extraction, refining, transporting and marketing of petroleum products. The major volume
products of the industry are fuel oil and gasoline (Wikipedia, 2016). Oil and Gas industry is a
source of wealth and money for any country which produces it. It is the only reason for gulf
countries to be as wealthy as they currently are. 1/6th of world’s GDP is formed from this
industry (Iran Chamber Society, 2012).
7.2. Importance of Oil and Gas:
Crude oil is a dominant part of modern life and it is one of the most important energy source
in the world. Human beings depend on crude oil in numerous ways such as for the food we eat,
the electronics we use at home and the clothes we wear and many more. Without oil, it is
impossible to imagine to continue to enjoy the same current standard of living. The way human
live, work and travel thus, all depend on oil and gas. Oil is the most important transportation
fuel in the world. Approximately 90per cent of entire transportation fuels originate from crude
oil (OPEC, 2013).
Apart from this, oil and gas is also used to make plastics, cleaning products and even medicines.
This modern life as the world knows is really not possible without oil and its products. Many
of the day to day items humans use are either made from oil or are reliant on oil for their
manufacture. Some of these products comprise heating oil, kerosene, jet fuel, diapers, dentures,
fertilizers, shampoo, lipstick, shaving cream, deodorant, musical devices, crayons, computers,
cameras, contact lenses, glue, synthetic fibres, toothpaste, artificial hearts, tires, and even
aspirin (OPEC, 2013).
Therefore, oil and gas industry is very important to the world.
7.3.
Oil and Gas price fluctuation in recent years:
The strong drop of both crude oil and natural gas prices across the year 2014 / 2015 was really
dramatic. Crude oil prices begun the year 2015 at almost 55 dollars per barrel which dropped
hard to 37 dollars per barrel by December of that year. This price was the lowest level since
the year 2004 (Ernst & Young Global Limited, 2015).
During the mid-2014, the same crude oil prices were over USD 100 a barrel. The same crude
oil price fell really badly by February 2016 as it was recorded to be almost USD 27. It was not
only crude oil, but there was also a major drop in natural gas prices. This prices drop was near
14-year lows (Egan, 2016).
Figure 1: Crude Oil Price
(New York Times, 2016)
7.4.
Reasons for Oil and Gas price changing:
There are various reasons for Oil and Gas price changes. Some of the main internal and external
factors are:
7.4.1. Internal Factors:
a. Oil companies going bankrupt:
There was a time in the history of oil and gas industry, when oil prices were easily sold 90
dollars per barrel to 100 dollars per barrel. During this period, shale oil boom took off in North
America. As the shale oil production became a big blockbuster in the oil and gas market, these
oil and gas companies acquired on tons of debt to finance these costly drilling which was
necessary for finding oil and gas. This led to the resulting flood in Unites States oil production.
Hence, this flood of oil and gas generated a grand supply extra which has now become one of
the reason to crash the crude oil price badly (Egan, 2016).
b. Competition among industries:
OPEC member countries took on competition with United States shale oil industries to compete
for the Asian market. Thus, this competition between OPEC and United States resulted in the
production of oil and gas in a very high quantity from both side. This extra growth in production
created high surplus which lead to the price of oil to drop. Thus, the oil and gas producing
industries had to suffer from big financial loss (New York Times, 2016).
c.
Negligence:
The Oil industry around the globe did not take the price drop in early 2014 seriously and these
companies thought the price drop was not a long term (England, 2016). This negligence from
Oil and Gas industries concerning the early price drop lead to further price drop.
7.4.2. External Factors:
a. Speedy production of Oil in enormous quantity:
North American has almost doubles it internal production of oil and gas over the last few years.
Countries like United States, thus can reduce and even stop oil imports because of its internal
shale oil production. OPEC member countries like Saudi Arabia, Algeria and Nigeria are now
rapidly competing for Asian markets as United States has dropped the import of oil and gas
(New York Times, 2016).
b. Improvement in making Modern Energy Efficient Cars:
Not only the production of oil is getting surplus, but also consumption of oil is getting reduced.
One of the key reason for demand of oil reducing is modern highly developed technologies and
energy efficient design. Thus, even though the economies of many developing countries and
even Europe may be considered weak, but the vehicles that run on the road are becoming more
high tech and energy-efficient. So, the requirement of oil and gas is reducing. (New York
Times, 2016).
7.5.
Lifting international sanction on Iran:
Apart from all the internal and external factors discussed above, one of the another crucial
factor for changing price of oil and gas can be lifting of international sanction on Iran. The
major consequence of United States, European Union and United Nations sanctions set on Iran,
caused oil and gas production of Iran to dip by about 1 million barrels per day in past years
during the sanction. This sanction also blocked oil and gas industries of Iran to buy the modern
international oil field technology, machinery and equipment. Since, now the sanctions has been
lifted, the oil and gas industries in Iran would actively participate in oil and gas production as
it did before the sanction (New York Times, 2016).
This means one more big supplier added to the international market supplying oil and gas.
According to Michael Porter and his theory of Porter’s Five Forces, bargaining power of
suppliers get weak when there is more supplier and production is abundant. So this is what has
been implied in the oil and gas industry. With one of the biggest supplier added to the pool, the
price of oil and gas is bound to change.
7.6.
So what is international sanction on Iran and its impacts?
International sanction on Iran by US:
The United States has enforced limitations on activities with Iran under numerous legal
authorities since 1979, after the capture of the U.S. Embassy in Tehran (Department of State,
US, 2010).
In October, 1987, the then President Ronald Reagan block all the import of goods including oil
from Iran. In the executive order 12613, he clearly stated that even petroleum products that was
refined from Iranian crude oil in a third country will not be imported (Regan, 1987).
In March 1995, the then President William J. Clinton, stated ban all complete supervision and
management duty by America, for the development of petroleum resources located in Iran
(Clinton, 1995). So this executive order 12957, stops any investment in oil industry in Iran by
any American or American company.
The Department of State's Office of Economic Sanctions Policy and Implementation was liable
for enforcing and applying a number of United States sanctions programs that prohibited access
to the United States for industries that involved in certain commercial activities in Iran
(Department of State, US, 2010).
Reformed International sanction on Iran by UN:
The United Nations implemented the fourth in a series of Security Council Resolutions
(UNSCR 1929 of 2010) on 9th June 2010 intending to put a halt to nuclear activities of Iran.
Along with imposing an effective arms embargo on Iran, the Resolution announced additional
sanctions and added a quantity of target entities to which those and prevailing sanctions would
apply (Linderman, et al., 2011).
These sanctions mainly focused on containing dealings in the energy sector, predominantly in
the oil, gas and nuclear industries. Also, these sanction restricted investment and financing of
certain enterprises in Iran. Thus, Iran during the sanction, was incapable to meet its domestic
fuel consumption because it lacked of adequate refining facilities. Instead Iran had to import
refined petroleum products. The new limitations were anticipated to deny Iran of such imports
and strangle the development of related facilities in Iran. Nonetheless, the impact of the
sanctions also resonated in the international trade, shipping and financial sectors.
This sanction from UN also included concern such as check of ships, aircraft and cargo heading
to or from Iran and of ships on the high seas if forbidden cargo is doubted to be aboard and
prohibition on the provision of financial facilities, including insurance cover to Iranian entities
(Linderman, et al., 2011).
Reformed International Sanction on Iran by European Union:
European Union applied a Regulation and a Council Decision legislating existing United
Nation sanctions in European Union Member States in 2007. In broad terms, European Union
Regulation 423/2007 presented a ban on (i) the direct and indirect sells, supply, transfer or
export of certain goods and technology that could be used in nuclear activities by any Iranian
entity or in Iran; and (ii) the setting up of any connected direct or indirect technical help,
brokering services, manufacturing investment, financing or financial assistance. The
Regulation also delivered a “blacklist” of people, entities and bodies whose assets had to be
frozen by European Union Member countries (Linderman, et al., 2011).
With effect from 27 July 2010, European Union Regulation 668/2010 added to the list of
Iranian target entities whose funds and economic resources are frozen pursuant to European
Union Regulation 423/2007. The list of targets now includes all branches and subsidiaries of
banks and aviation companies (Linderman, et al., 2011).
7.7.
Lifting of this international Sanction on Iran:
On 16 January 2016, The European Union terminates all its nuclear-related economic sanctions
including an embargo on buying Iranian crude oil, but more importantly, ends restrictions on
Iranian trade, shipping and insurance (BBC, 2016).
The UK’s foreign secretary, Philip Hammond, said: “The nuclear deal with Iran, in which
Britain played a major role, makes the Middle East and the wider world a safer place. Years of
patient and persistent diplomacy, and difficult technical work, have borne fruit as we now
implement the deal” (The Guardian, 2016).
“Implementation Day is a demonstration of how persistent, high-level engagement is a critical
ingredient for successful policies between Iran and the international community,” said Reza
Marashi of the National Iranian American Council, who followed the nuclear talks closely (The
Guardian, 2016).
7.8.
Why International Sanction on Iran could impact Oil and Gas industry and
petroleum prices?
Iran is one of the country that produces oil and gas. Its oil and gas industry dates back to the
early 20th century, making it the oldest in the Middle East. Anglo-Persian Oil Company
(APOC), which is now known as BP, was formed in Iran with its task being extraction and
marketing of the oil produced in the southwestern region (The Gulf Intelligence, 2016).
Iran has one of the world’s greatest mature oil sectors and the energy infrastructure that has
been built up with more than 100 years of experience in this industry. In today’s date Iran’s
conservative proved oil reserves stand at 157 billion barrels. This country now has 9 refineries,
oil terminals, extensive pipeline networks, and ports along the Gulf coast, and a large
petrochemicals industry (The Gulf Intelligence, 2016).
Summary of Literature Review:
Oil and Gas is one of the vital industry in the world. Oil and Gas is very close to the basic need
of modern human lives. From transportation to cooking gas at home, all needs oil and gas to
operate. Thus, this industry is one of the main industry that impacts the economy of any country
that supplies oil and gas and also of the country that imports them.
There are various reasons that causes the price of oil and gas to fluctuate. From rivalry between
US and gulf countries in the oil production to development of highly energy efficient cars and
other appliances, all could play major roles in changing price of oil and gas. Apart from this
internal and external factors, lifting of the international sanction on Iran can also be one of the
main reason for present fluctuation of the price in oil and gas industry.
If it could be the one of the reason for changing oil and gas price, it is important to understand
what was the international sanction and what impact it has on Iran and other countries that used
to trade with Iran.
Also, it was important to understand why Iran is impactful on oil and gas industry as this would
give the base of the hypothesis of the research that lifting of international sanction on Iran
would impact the price of oil and gas industry.
8. Result and Discussion:
8.1.
History of Iranian Oil Industry and its dominance in the world:
Iran's petroleum industry is more than 100 years old and the oldest in the Near East. According
to published figures in the year of 1963, Iran had ranked 3rd in reserves and production in the
Near East. These reserves of Iran at that time of 1963, were estimated at 35 billion barrels and
it constituted about 11 per cent of the world's total oil reserves (Nahai & Kimbell, 1963).
In the year of 1961, Iran managed to output of more than 430 million barrels which was 5 per
cent of entire world output for that year. Also, Iran had ranked fourth amongst world petroleum
exporters in the same year as they were able to provide 8.4 per cent of entire world exports.
According to United States Department of Interior, 1963, Iran was the 6th largest producer of
crude petroleum in the world at that time. Iran at that time exported oil to many countries in
Asia, Oceania, Europe, and Africa. In the year of 1960, Iran supplied around 12 per cent of net
crude imports of Western Europe. Australia and Canada imported 14 per cent and 17 per cent,
respectively, of the net imports from Iran during that time. Iran supplied India almost 57 per
cent of its net crude imports and almost all crude imports of Republic of South Africa during
that period. Iranian refined products in 1960 had its major buyers as countries like the Republic
of South Africa, India, Pakistan and the United Kingdom (Nahai & Kimbell, 1963).
8.2.
Importance of Oil Industry of Iran to Iranian government and people – before
International sanction:
With such a dominance in the past, the significance of these petroleum industry in Iran to its
domestic economy can be easily understood. In the year of 1961, the petroleum industry of
Iran made about 19 per cent of the Iran's gross national product. The industry then was the
largest industrial employer providing employment to mass number of people. This petroleum
industry of Iran was also it’s the largest source of foreign exchange then with almost 70 per
cent of foreign exchange generated by this industry. Also, these oil and gas industry of Iran
was estimated to contribute 25 per cent to the entire government revenue of Iran (Nahai &
Kimbell, 1963).
8.3.
Oil and Gas Price – before Iranian Revolution of 1979:
The major oil crisis occurred in 1973 with Arab Oil Embargo where Egypt and Israel had few
problems. This led to a very rapid rise of oil price from 5.12 dollars per barrel to 11.65 dollars
per barrel which was about 128 per cent increase in the price. By the end of this tension between
these countries in 1975, oil prices have reached to nearly 15 dollars per barrel. Since then, the
price stabilised throughout the globe (Shojai, 1995).
8.4.
Iranian Revolution in 1978-1979 and its impact on Oil Production of Iran:
During the 1973-1974 Arab Oil Embargo period increase its oil production. The country
however in 1978 was going through large public protests in 1978. These chaos and strikes
spread to the oil sector by the fall of 1978 as the petroleum production of Iran dropped by 4.8
million barrel per day which was about 7 per cent of world production at the time (Hamilton,
2011). On 8 September 1978, because of all the chaos, Martial Law was declared in Iran
(Shojai, 1995). In the beginning of 1979 the Shah fled the country, and Sheikh Khomeini seized
power. This led to the major oil crisis in the world as Iran was one of the biggest supplier of
Oil then.
8.5.
Impact of Iranian Revolution on Oil Price:
The impact of Iranian Revolution was not felt immediately on the oil price. In fact, for the sixmonth period from November 1978 to April 1979, during which the average gross supply
shortage was around 3.5 million barrel per day which raised to 5.1 million barrel per day in
January and February 1979, the Island Regulatory and Appeal Commission increased the price
of oil by only 20 per cent which is from 14.63 dollar per barrel in October 1978 to 17.58 dollar
per barrel in April 1979 (Shojai, 1995).
8.6.
Iran recovers its oil production – post Iranian revolution:
By March 1979, Iranian production had recovered to 2.54 million barrel per day from 700,000
barrel per day in January and February that year. The shortage of the oil became less than 1 per
cent of world oil production. This again brought stability in oil prices stabilizing to around 16
dollars per barrel. By April, 1979, Iran boosted its production up to 4.2 million barrel per day,
recovering all its production amount (Shojai, 1995).
After the revolution, the then ruler of Iran, Khomeini declined any western influence on Iran
and it production. Therefore, no western countries were able to control or even operate the
running of oil industry. By December 1979, world oil prices raised roughly fifty per cent higher
than when Iranian Revolution first started. U.S. oil refining companies has to pay around 30
dollars per barrel for OPEC’s crude oil. This price was twice of what it had been one year
earlier and roughly 10 times the price of 1970. These new oil policies of Iran marked an
economic shift for Iran as it began gaining more profits from its oil industry (Wise, 2011).
8.7.
Iran-Iraq War 1980-1988 and its impact on Iran’s Oil Production:
Iranian oil production had returned to around partial of its pre-revolutionary levels in the end
of 1979, but it did not last longer. Soon, the oil production of Iran was affected by a war against
the Iraq in September of 1980. Both countries had to face consequences as the combined loss
of oil production for those these two countries again amounted to about 6 per cent of world
production at the time (Hamilton, 2011).
The war between Iran and Iraq continued for years until 1988. The oil production for both
these countries were affected badly and hence the recovery process was very slow.
Because of the significant price rise of the 1970s, world petroleum consumption declined
significantly in the early 1980s (Hamilton, 2011).
8.8.
International Sanction on Iran:
The international Sanction in Iran can be mainly divided into:

US sanction on Iran

European Union sanction on Iran

UN sanction on Iran
However, the US sanction on Iran and European Union sanction on Iran specially made impact
on Oil Industries in Iran.
8.8.1. United States Sanction on Iran and its Impact on Oil Industry in Iran:
The United States first sanctions against Iran was because of the capture of American diplomats
in Tehran in 1979. The then, President Jimmy Carter order seizing Iranian property in the U.S.
and declared that “the situation in Iran constitutes an unusual and extraordinary threat to the
national security, foreign policy and economy of the United States.” (Harvard Kennedy School,
2015).
In October, 1987, the then President Ronald Reagan block all the import of goods including oil
from Iran. In the executive order 12613, he clearly stated that even petroleum products that was
refined from Iranian crude oil in a third country will not be imported (Regan, 1987).
In March 1995, the then President William J. Clinton, stated ban all complete supervision and
management duty by America, for the development of petroleum resources located in Iran
(Clinton, 1995). So this executive order 12957, stops any investment in oil industry in Iran by
any American or American company.
8.8.2. European Union sanction on Iran and its impact on oil industry in Iran:
European Union council decision of 2010, forbid its member countries from selling, supplying
or transferring of key equipment and technology as well as related technical and financial
assistance to Iran, which could have been used in main sectors in the oil and natural gas
industries of Iran (European Union, 2010).
European Union in 2012, decided a full oil embargo as European governments agreed in
opinion to levy a ban on imports of oil from Iran. This was possibly severe blow to the already
unsteady Iranian economy and a substantial growth in the international pressure on the Tehran
government.
European Union was the second-biggest customer for Iranian crude after China, buying about
450,000 barrels out of a total of 2.6m barrels a day the country exports (The Guardian, 2012).
Figure 2: Crude Oil production in Iran
(Forbes, 2016)
For the figure above, one can see oil production of Iran dipped during the year of 2012, when
the EU passed oil embargo sanction law on Iran.
8.9.
More Detail look on the impact of these international sanctions on Oil
Industries in Iran:
International sanctions against Iran primarily targeted its energy sector. This was done so in
order to damage Iran’s ability of production, selling, transportation, and profiting from its oil
and gas industry which is their nation’s most vital natural resources. Iran had 10 per cent of the
world’s crude reserves, and in 2008 - 2009 oil revenue of Iran accounted for 65 per cent of
government income (Harvard Kennedy School, 2015). The most important impacts of Sanction
on Oil and Gas Industries of Iran are as follow:
8.9.1. Iranian Oil Embargo:
United States of America and the members of European Union were prohibited to import any
oil from Iran. This European and American sanctions forced Iran to reduced its oil and gas
production and export from average of 2.5 million barrels per day, in 2011, to 1.1 million
barrels per day. This is more than half of the reduction of the oil and gas production. Also, all
American companies were also prohibited from facilitating transactions involving Iranian oil
since 1995 and purchasing of oil produced by Iran. However, it was long after in the year of
2012, the European Union imposed an oil embargo. Therefore, until 2015 only countries like
India, China, South Korea, Japan, Turkey and Taiwan purchased Iranian oil at a fixed level
(Harvard Kennedy School, 2015). Thus, Iranian Oil Embargo from US and European Union
highly reduced the oil and production of Iran.
Figure 3: Iran oil production during the International Sanction set by United States, United Nations and the European Union
8.9.2. Iran was prohibited to transport oil and other goods:
During the sanction set by U.S. and E.U. Iran was limited to transport all its exports including
oil and gas. Companies are banned from providing insurance or reinsurance services to any
Iranian oil industries or their tankers, and also the United States would identify and designate
scores of Iranian ships. These international Sanctions also contained the provision of vessels
or of services to Iran’s shipping or shipbuilding industries. These sanctions effectively blacklist
Iran’s shipping sector (Harvard Kennedy School, 2015).
8.9.3. Investment on Oil and Gas production in Iran was prohibited:
The sanction set on Iran by United States stopped companies from exporting equipment used
in oil and gas production to Iran. The sanction also prohibited foreign organisations from
making any significant investments in oil and gas fields in Iran. This act thus, limited ability
of Iran to improve its oil sector and modernise it. The European Union sanctions likewise
prohibited its member countries from exporting the oil and gas technology and equipment to
Iran. South Korea and Japan also implemented similar provisions during the sanction (Harvard
Kennedy School, 2015).
8.9.4. Iran had restricted access to its oil revenues:
The sanction set by United Stated restricted Iran from accessing its oil revenues. The revenue
generated from sales of oil to six countries (India, China, South Korea, Japan, Turkey and
Taiwan) by Iran, was restricted, in accordance with U.S. sanctions law. Iran could only use that
revenue to purchase humanitarian goods from anywhere in the world or could use it to purchase
goods from the same country to which the oil was sold (Harvard Kennedy School, 2015).
8.10. Iran Oil and Gas Industry – Post international Sanction:
Iran has boosted its oil exports by more than 700,000 barrels per day to 2 million
bpd, according to Argus Research. Iran’s total production is now up to 3.5 million bpd, nearly
back to its levels in 2011, before sanctions were tightened. That growth in output is faster than
what some analysts expected. The additional exports amount to 20 million more barrels a
month. Oil minister Bijan Zangeneh inked a memorandum of understanding with his Korean
counterpart on enhancing the nations’ cooperation on oil and gas projects. South Korea
promised to invest $25 billion in Iranian infrastructure. Seoul’s purchases of Iranian oil
doubled last month to 100,000 bpd, according to Argus.
(Forbes, 2016)
8.11. Oil Prices – Post International Sanction:
On Monday 18th of January 2016, sky news had a headline stating “Iran Nuclear Deal Pushes
Oil to 13-year Low” (Sky News, 2016). This heading itself made it clear that Iran being back
in the oil export market is big factor of reducing the oil prices. According to Telegraph, oil
prices had tumbled when world powers together agreed in the summer of 2015 to lift economic
sanctions against Iran. This lifting of sanction would mean a flood of crude oil entering an
already over-supplied market.
Brent crude oil, which is taken to be a global benchmark mainly traded in London, went down
28pc since May 2015 and this Brent crude oil was trading at around 48 dollars per barrel.
Iran is a country who played a major part in the export of oil around the globe but its production
has been severely curtailed by sanctions. Output during the sanction of Iran was around 2.7
million barrels per day (bpd) of which only 1 million barrels per day were exported to other
countries. This is almost half of what Iran was capable of pumping (Telegraph, 2015).
8.12. Opportunities for foreign Investment in Iran – Post Sanction:
Iran is known to hold the world’s fourth largest crude oil reserves and 2nd largest gas in the
globe. According to the Statistical Review of World Energy done by BP in the year 2015, Iran
has successfully proven oil reserves of 158 billion barrels which is equivalent to more than 150
years of production at the rate of extraction recorded in 2014 (Foreign and Commonwealth
Office, UK, 2016).
Some of the major investment opportunities and priorities for foreign companies are in the oil
and gas industry that includes enhanced oil recovery projects and the construction of liquefied
natural gas (LNG) export facilities. It is known that Iran shares the world’s largest gas asset
with Qatar and it has the potential to become a leading LNG exporter if it gets the right
technology for its extraction and refining (Foreign and Commonwealth Office, UK, 2016).
The lifting of economic sanctions has unlocked major spending on the oil and gas industry that
would benefit from investment and access to new technology.
8.13. Challenges that Iran would Face – Post International Sanction:
Even though Iran have significant reserves of oil and gas, some analysts do doubt on Iran’s
ability to surge output considerably over such a short period of time.
The U.S. Energy Information Administration had also warned that the speed at which Iranian
production would increase after lifting the sanction could highly affect its latest forecasts of oil
prices (Telegraph, 2015).
Even though the international sanctions that handicapped Iran’s oil industry were lifted in start
of 2016, still at the last quarter of 2016 foreign companies are still unwilling to invest in Iran’s
oil and gas industry. This could be primarily because these companies are worried about current
limitations on economic transactions with Iran, politician’s harsh anti-foreign rhetoric, and
political instability in the Middle East. Above all, the foreign companies are worried about
ongoing doubt surrounding Iran’s foreign oil contracts.
Iran has only allowed foreign companies to invest in Iranian oil industry through “buy back”
contracts. Basically, Iran compensates foreign companies who improves Iranian oil resources
with the ability to sell a percentage of the oil for a certain period of time. These buyback part
of the contracts could be established with respect to the market at the beginning of the
relationship. This meant the investment values much less if it begins when oil price is $50 per
barrel than if it begins when oil price is $100 per barrel. Since the oil price at the moment is
almost $50 a barrel and with the other challenges of operating in Iran, this country would
struggle to attract international investment for now (CNBC, 2016).
Because of this part of law, leaders and politicians in Iran are trying to form a new model for
foreign investment and deteriorating oil production may help move the process along. Oil
Minister of Iran, in November 2015, revealed his plans for IPCs (Iran Petroleum Contracts)
which are supposed to start joint ventures between the Iranian National Oil Company (NIOC)
and the foreign company and last for 20-25 years. However, political issues have stopped Iran
Oil minister from resolving important details of these contracts, and they are not yet available
(Forbes, 2016).
This has really made it difficult to attract major foreign investment in Iran.
8.14. Comparison of Oil Prices before and after various events evolving around Iran:
During the Iranian revolution the price of oil dipped as Iran could not supply to its potential.
This created a partial shortage of oil. But OPEC country like Saudi Arabia took the opportunity
to the fullest producing high amount of oil and gas during that period. However, as Iran
recovered from the Iranian Revolution the price of oil started taking off and raised rapidly.
Again after a short period Iran was in state of war with Iraq from 1980 to 1988. This again
stopped both the countries producing oil to their potential and the oil prices summed again in
the global market. Once again, as Iran was not able to produce to its fullest and the oil price
slumped.
But this pattern completely changed in the modern era. During the international sanction
primarily from 2007 to 2015, the oil price was much more stable and it was actually fluctuating
up and down. However, once the sanction was ready to be lifted the oil price slumped and with
Iran producing more oil the price of oil fell again. This was a completely different pattern to
what was seen during the Iranian revolution and 8 years long Iran-Iraq war. Where the price
dipped when Iran was not producing to its fullest and the price raised during its recovery, the
opposite pattern can be seen during and after the international sanction. Thus, it is very
important to understand why the pattern changed and why oil price dropped when Iran joined
the oil exporting platform again.
Events
Price (Before)
Price (During)
Price (After)
Iranian Revolution
Stable
Decreased
Increased
Iran-Iraq 8 years’ war
Increasing
Decreased
Increased
International Sanction Increasing
Peaked to highest Decreased
ever price
Table 1: Price Comparison before, during and after historical events
The oil price really peaked during the international sanction. Where price increase during other
periods could not match the rate at which it rose before and during the international sanction.
During the international sanction the oil price per barrel peak to the highest ever and was on
the top. But as soon as the international sanction was lifted, the price again dipped at very rapid
rate. This year of 2016 the price is getting much stable. However, in overall, one can see the
price is dropping post sanction.
(Statista, 2016)
According to above graph one can see the price increase and decrease throughout the years.
The oil price changing with historical events in Iran is also shown in the table above. With both
table and oil price graph, the pattern of oil price increase and decrease can be seen. Thus, the
pattern should be analysed to understand what factors could have changed the pattern of oil
price changing in respect to Iran and its historical events.
8.15. Analysis of Oil Price changing during and after those events:
After going through a lot of research one of the reason for this pattern change is the competition
in the oil market. When Iran was struggling in Iranian Revolution and Iran - Iraq war, the
competition in the oil export market was very less. OPEC and its member countries and few
gulf countries were only the major oil exporter during those days. Thus, one can see more
researchers talking about partial oil shortage during those periods. Thus, there was no
competition in the market and therefore, oil price could not have fallen when the production
was increased when Iran recovered from those two big major historical events.
But when one looks at modern era, American shale company is providing a strong competition
to OPEC and its members. With more and more competition in the oil and gas production
industry, the bargaining power of customer increases with many suppliers. Thus, when Iran
also joined the race, the amount of oil production surpluses the world requirement and thus
when something is abundant, it's price is very obvious to drop. Thus, lifting of international
sanction on Iran brought the price of oil down.
Also, there are various other factors that has brought the price of oil and gas down. Few of
those other important factor those were not there during Iranian revolution and Iran - Iraq war
and are present at the moment are more flourished use of renewable sources of energy like
solar, wind, electric and smart cars and vehicles and more. Even the cars these days are modern
enough and energy efficient needing less oil to operate which during 1970s and 1980s were not
possible.
8.16. External factors and other factors that also affect the oil price:
a. Speedy production of Oil in enormous quantity:
North American has almost doubles it internal production of oil and gas over the last few years.
Countries like United States, thus can reduce and even stop oil imports because of its internal
shale oil production. OPEC member countries like Saudi Arabia, Algeria and Nigeria are now
rapidly competing for Asian markets as United States has dropped the import of oil and gas
(New York Times, 2016).
b. Improvement in making Modern Energy Efficient Cars:
Not only the production of oil is getting surplus, but also consumption of oil is getting reduced.
One of the key reason for demand of oil reducing is modern highly developed technologies and
energy efficient design. Thus, even though the economies of many developing countries and
even Europe may be considered weak, but the vehicles that run on the road are becoming more
high tech and energy-efficient. So, the requirement of oil and gas is reducing. (New York
Times, 2016).
c. Popularity of renewable source of energy:
Renewable source of energy such as solar power, hydro power, wind power is growing to
become popular choice of energy and also slowly, though in small amount, are replacing use
of oil and gas by some amount. Equipment people use are also changing to these renewable
source of energy in many countries with access to these sources.
a. Summary:
Iran has been highly unlucky regarding its oil and gas industry since the Iranian Revolution of
1979. From being one of the biggest oil exporter in the world to not being able to sell its oil
and gas products to most of the part of the world is very devastating. Not only this hampers the
economy of the country but also many people loosed their job as the production of oil was not
required at very big amount because of the sanction.
Political situation of Iran has always directly impacted the oil and gas industry in Iran. This
can be easily visible with oil production of Iran degrading during the Iranian Revolution
creating partial shortage of oil in the world, oil production degrading again during the 8 years’
war between Iran and Iraq and oil production again reducing with various sanction on Iran by
US, European Union and the UN. This sanction stopped member countries from European
Union and United States from buying any oil from Iran, stopped these countries by supplying
Iran with any machinery and technologies required for oil production in Iran. Even oil produced
in Iran but refined from third country was prohibited.
All this situation should have highly impacted the people and the government and the economy
of the country. With being cut off by half of the world and biggest importer like European
Union, Iran had no choice but to reduce its production. With less production, Iran could make
less profit and less revenue. This would definitely be concern for the people and the country.
After Iran came to an agreement regarding its nuclear deals, sanction set on Iran is now lifted
in the year of 2016. This lifting of sanction once looked highly impossible, however, the good
news for oil and gas industry in Iran was the sanction was lifted.
Lifting of the sanction has been a breather for Iran and its people. Iran has increased its
production rapidly and is trying to reach its full potential in few more year.
Lifting of sanction on Iran also has opened up the transportation of oil and gas to European
Union rope which was blocked during the sanction which means Iran was still export crude
and transport it to third country to get it refined.
However, there is many challenges that Iran oil and gas industry has to go through before
reaching its target of producing oil and gas to its potential. One of the biggest challenge that
Iran would be facing is the requirement of investment from foreign countries as these
productions would require very big sum of capital. Thus, Iran oil and gas industry will still be
going through some trails as investment in Iran is still challenge for foreign countries as the
sanction has just been lifted and investing in such short span is not what big countries would
prefer.
The other challenge that oil companies have to face is the government policies of Iran. As all
the contracts with foreign countries would be like a buy-back contract and these countries
cannot own any business for a long time in Iran so foreign countries might not be interested in
investing on such contract and companies. Thus, the government of Iran would have to work
on these policies to attract foreign investment and grow its oil and gas industries to its full
potential.
Oil prices have also changed with Iran being forced the sanction and lifting of the sanction. It
can be seen from various facts and figures that price of the oil has always been associated with
Iran and all its historical events.
Iranian revolution was a major event regarding Iran and also oil production and oil export
around the world. The price of oil per barrel fell with this event and once Iran started recovering
the price started to rise once again. This pattern was seen during the 8 years long Iran and Iraq
war. The price was increasing before the war, it dropped all throughout the 8 years of the war.
Once the war was settled the price started to rise once again. The pattern changed during the
modern time. When Iran was under the sanction, the price of oil raised and reached to the
highest peak ever. But once the sanction on Iran was lifted, the price started to drop
significantly.
d. Conclusion
With this research, effect on price of oil and gas with various historical event in Iran and
surrounding Iran was figured out. With this research one gets to understand how political events
in a country can hamper the aspect of world in which that country once had dominance on. Iran
once had a huge dominance in the world oil and gas export market. Therefore, the political
event in and surrounding Iran dropped its production of oil and gas. This lead the country to
lose it revenue from oil and gas and also its dominance on it. Since, Iran still has big potential
in oil and gas productions, suppressing of production of oil in Iran and it bouncing back from
all those events have directly or indirectly impacted the price of oil and gas in the world.
The research mainly looked at how production, transportation and export of oil and gas was
hampered during Iranian Revolution during 1979, Iran-Iraq War during 1980-1988 and the
biggest of all, U.S., European Union and United Nations sanction law against Iran.
Iranian Revolution was something internal in Iran. It did not put any stoppage on its oil and
gas production, transportation and exports directly. However, since it was something internal,
it still hampered the oil and gas industry and the production dipped from what it was producing.
This also caused oil price to drop.
Similarly, Iran – Iraq war that lasted 8 years also did not directly affect the oil and gas
production, transportation and export directly. Again, as it was something that affected internal
affair directly production had some disturbance causing the production to reduce by a
significant quantity.
Iran is known to hold the world’s fourth largest crude oil reserves and 2nd largest gas in the
globe. This makes it very easy to understand the dominance once Iran had in the oil and gas
export market. Therefore, we can see stopping Iran to sell its oil and gas to the world market
during the International Sanction, specially set by European Union and United States forced
Iran to reduce its production to half of what is was producing. This seriously affected the
country’s economy as Oil and Gas is the biggest export of the country. Also, during the
sanction, European Union member countries and United States prohibited themselves from
selling any technical, machinery and higher technology materials to Iran which it could use to
increase its production and make most out of its potential. This, really push back Iran’s oil and
gas industries as they could not move forward with the technology. The another stopping for
Iran’s oil and gas industry during the international sanction set by United States and European
Union was limitation in transportation. As the member countries of European Union and United
States stopped any foreign investment in Iran and investment on insurance and reinsurance of
its transportation held the country really back from exporting its oil and gas to different part of
the world. The sanction also stopped Iran from using its revenue from oil and gas industry to
whatever they would like to. They were only allowed to use it buy humanitarian goods. Again,
this hampered Iran government to make their own decisions.
After looking at the disturbance in production, transportation and exporting of oil and gas, it
was crucial to look at the effect of all these event on the price of oil and gas.
Oil and gas prices also were effected directly or indirectly with all those events in Iran. Iranian
Revolution was at the later stage of 1970’s. Iran was one of the biggest producer of Oil and
Gas at that time. Therefore, hindrance in production of Oil and Gas from Iran made the price
of Oil and Gas to drop a little. But once the hindrance was over and Iran recovered, the price
started rising again. Then, during the Iran – Iraq war of 8 years the price fell down again. Once,
Iran recovered from this war, the price again started to gradually increase. This pattern of price
reducing when Iran production was hindered and price increasing during the recovery was all
opposite during the international sanction. So during the international sanction, the price was
increasing but then when the sanction was lifted, the price decreased.
The change in the pattern can be understood with respect to time. Iranian Revolution took place
in 1970’s and Iran-Iraq war took place in 1980’s. During those time, the use of renewable
sources was not that popular, cars were not as energy efficient as modern times, and even
American shale oil and gas was not as big as it is now. Therefore, there was no external factors
and not so big competitions that affected oil and gas prices during that time. But the
international sanction was mainly during 2010-2015 which is modern era. The oil production
in these era is more than what is required as there is a huge competition among, gulf countries,
OPEC members and American shale companies. The modern cars have become more energy
efficient and used solar power or electric battery for most of the uses. The use of oil and gas in
most of the equipment have been replaced by renewable source of energy. With all these
external factors and high competition, adding another big giant oil producer and exporter means
more oil and gas then required thus the price has come down instead of going up as post Iranian
Revolution and post Iran Iraq War.
With more and more oil production and more energy efficient equipment and machinery, the
oil and gas price can only go one way which is downhill.
However, the lifting of the
international sanction is very new and less than a year, therefore the more effects can be seen,
read and understood in upcoming years.
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