Iran's Reintegration into the World Economy as Sanctions are lifted; Not Too Fast!

Iran's reintegration into the global economy with the lifting of economic sanctions brings great joy of Iranians but deep reservations to many Americans. With access to more than $100 billion in once-frozen assets, Iran will undoubtedly help shape our world economy, allowing Iran to expand its sphere of influence, mainly in the Middle East.

To Iran, one of the positive elements in this turn of events is its ability to rejoin the top ranks of global oil producers. As I've outlined in previous writings, once sanctions were lifted, Iran would be well positioned to influence the oil market, a mix that now includes the heady presence of Saudi Arabia, Russia and the United States. To what degree, you might well wonder.

Answer: The market and geopolitics together will decide.

All this comes on the heels of a sharp drop in oil prices to below $33 a barrel, something we see reflected whenever we pump gasoline to our heart's content or read about fiscal jitters in states that rely heavily on oil revenue to fund government operations and services. Now that sanctions are officially lifted, oil prices will continue to decline further. Yes, economic opportunities await Iran but they won't come too fast. Iran's economy consists of a series of knots that will take time to loosen.

For instance, Iran had to store some of its oil in tankers at sea due to international sanctions. Not anymore. The lifting of sanctions allows it to finally sell its oil on the open market -- ironically, contributing to even lower prices for itself and everyone else. My prediction is Iran could add between 600,000 and 800,000 barrels per day to its output. This possibility has already created panic in the oil market, mainly in Muslim arch-rival Saudi Arabia.

Could this explain the turmoil within Aramco, the Saudis' state-run oil company? Could it also explain the sudden visit of Chinese President Xi Jinping to Riyadh recently? The answer is yes. The added Iranian oil, I believe, is a conservative estimate. Iran's oil minister, Bijan Zanganeh, argued in an interview with CNN that Iran is aiming at an output of about 1.5 million barrels by the end of 2016, taking daily production output worldwide to about 4.2 million barrels.

You don't have to be a Nobel Prize-winning economist to figure out that oil prices will remain low for a while, perhaps longer than some suspected. However, should war erupt between Iran and Saudi Arabia -- which I do not foresee, nor do both countries really want for all their saber-rattling -- oil prices would quickly jump above $100 a barrel, triggering renewed interest in the oil patch of the United States.

While it's no secret that Saudi Arabia wants to eliminate competition -- mainly the U.S. shale boom -- in order to maintain high oil prices in the long term, the lifting of sanctions on Iran will force OPEC members to reconsider such strategies and step up production to defend their market shares, even as OPEC prepares for its much-anticipated June 2 meeting in Vienna.

All this comes with a Catch-22 challenge for Iran. Amidst an oil glut, it needs a barrel of oil to sell at $145 to balance its own budget. However, a flood of investments by other countries will allow Iran to reintegrate into the global economy. This could not be more evident than in a visit by Xi Jinping to Iran; German former chancellor Gerald Schröder's visit to secure Germany's business interests; and a visit by a high-level French delegation to Iran for the third time since the West reached a deal with Iran over the latter's nuclear program.

Against this backdrop, Saudi Arabia's internal political and economic turmoil -- especially Prince Muhammad bin Salman's latest announcement regarding partial sale of state-owned oil leviathan Aramco-- raises serious concerns. The question is whether the Initial Public Offering (IPO) of Aramco provides the kingdom more time and investment to weather devastating oil-price declines. The answer, theoretically, is yes. But reality suggests otherwise.

While my analysis suggests that such a public offering is designed to calm nervousness in the market, I'm convinced the kingdom will wait till after OPEC's June meeting in Vienna to move head. Equally important, between now and then, Saudis will be watching the market anxiously as Iran floods it with more oil. Further, the Saudi decision regarding the Aramco IPO depends on just how fast other economies (China, Russia, Germany, France, Great Britain, etc.) invest in Iran -- and the gate to securing contracts in energy and other sectors is wide open.

Although the Saudi crown prince is enthusiastic about partial sale of Aramco, such a move could stifle the global energy industry, leading to creation of a company with far greater market capitalization than Apple, ExxonMobil, Berkshire Hathaway and Google combined. After all, Aramco's net worth exceeds $7 trillion.

The other issue is legal. Should the kingdom move forward with this offering, it is legally obligated to disclose relevant audits of Saudi oil fields. My guess is Washington has no idea what the exact Saudi oil reserves are. Further, such a disclosure will highlight how much liquidity (in trillions of dollars) the kingdom has in U.S. banks and our economy. Such disclosure would have serious repercussions in the streets of Riyadh, Jeddah and the already marginalized southeastern part of the kingdom. And don't forget that country's double-digit unemployment rate.

Flip side in all this: whether such a decision could force loyalists of Crown Prince Mohammad bin Nayef -- main rival of Prince Mohammed bin Salman -- to orchestrate a palace coup. I wouldn't be surprised.

Meanwhile, Iran's minister of transportation says Iran has reached a tentative deal with the European consortium Airbus to buy 114 passenger planes Further, Iran looks to purchase 400 passenger planes over the next decade. Whatever your political orientation or however you feel about the wheeling and dealing of Mideast nations, let pragmatism and common sense prevail in the hope that Washington seizes the awaited economic opportunities so our own companies and the somewhat anemic U.S. economy at least have a share of the pie.