Why Markets Are Anxious About Iran’s Re-Entry Into the Global Economy

WASHINGTON (Tribune Washington Bureau/TNS) -
A money changer poses for the camera with a U.S dollar (R) and the amount being given when converting it into Iranian rials (L), at a currency exchange shop in Tehran's business district, Iran, January 20, 2016. REUTERS/Raheb Homavandi/TIMA ATTENTION EDITORS - THIS IMAGE WAS PROVIDED BY A THIRD PARTY. FOR EDITORIAL USE ONLY.
A money changer poses for the camera with a U.S. dollar (R.) and the amount when converting it into Iranian rials (L.), at a currency exchange shop in Tehran’s business district, Iran, Wednesday. (Reuters/Raheb Homavandi/TIMA)

After years of sanctions and isolation, Iran’s return to the international marketplace should be a welcomed big boost for a global economy desperate for good news. The country is rich in natural resources and has a large, mostly urban population of young consumers.

But the opening of Iran’s economy, following the lifting of nuclear-related sanctions last weekend, is being met with considerable skepticism and trepidation, especially in the U.S., where the stock market on Wednesday suffered one of its worst days in months.

The biggest immediate economic concern is that Iran’s re-entry will exacerbate the global oil glut. Iran has the world’s second-largest reserves of natural gas and the fourth-largest deposits of petroleum.

Since the U.S. and European Union sanctions in 2011-12, the country has produced on average roughly 3 million barrels of oil a day, although it was able to export less than half that amount in recent years. Some of that excess supply has been stored in tankers, and Iranian officials have said their plan is to ramp up production and ship an additional 500,000 barrels a day.

That may not seem like a lot in a world that on a typical day consumes more than 90 million barrels of oil and petroleum products. But the expected addition from Iran couldn’t come at a worse time.

Heavy U.S. production of shale oil in recent years and persistent pumping by major suppliers such as Saudi Arabia have kept building up petroleum stockpiles. Worldwide oil supplies exceeded consumption by about 1.5 million barrels a day at the end of last year, according to the U.S. Energy Information Administration. That excess inventory is forecast to grow to more than two million barrels a day on average this year, thanks in good part to Iran’s return.

With foreign investment and modernized infrastructure, Iran could crank up its aging fields more quickly and deliver as much as a million more barrels of oil a day within a year, said Gary Hufbauer, senior fellow at the Peterson Institute for International Economics.

Either way, Iran’s return has added another unpredictable ingredient to the volatile mix rattling stock markets already anxious about uncertain growth in China and the strong dollar. Eighteen months ago, a barrel of crude was trading at more than $100, but it’s since fallen to less than $27, with U.S. oil futures tumbling to the lowest since 2003.

Oil prices slid further on Wednesday, aggravating the stock market rout since the start of the year. The Dow Jones industrial average closed down 1.56 percent, after falling twice that much earlier in the day, and is now off 11 percent since late December, a correction in Wall Street parlance. Japan, meanwhile, entered bear-market territory Wednesday with declines of 20 percent or more from a recent high, following similar declines in Chinese markets.

For the U.S., there is an upside in the sinking gasoline futures: Motor fuel prices already have fallen sharply, to below $2 a gallon nationwide, on average. There will be extra savings this winter for consumers in the Northeast and other parts of the country who heat their homes with oil.

Yet more pain lies ahead for U.S. energy businesses and workers, especially in big fracking states such as North Dakota and Texas, as oil companies further curtail investments and costs, including for staffing. On net, most analysts reckon the depressed oil prices will be a wash for the American economy or modestly positive, as it relies primarily on consumer spending as the engine of growth.

Iran’s new economic freedoms more broadly will have limited impact on the U.S. for the foreseeable future, even though many see Iran as one of the last major economies to open.