What an Obama deal with Iran would mean for South Africa
The oil price could drop even further when sanctions are lifted from one of the world's four biggest producers
NE of the problems about the mess President Jacob Zuma’s administration has landed us in is that we become so fixated on it that we fail to notice developments elsewhere in the world that may affect us.
Such an issue, which has hardly attracted any attention here, is US President Barack Obama’s efforts to negotiate a nuclear agreement with Iran.
In his column in Business Day last Friday, Peter Bruce wrote about the importance of the US’s recovery from the great economic recession, together with its re-emergence as one of the world’s biggest oil producers, thanks to its fracking technology.
The US is producing a million barrels a day from its newly exploited shale gas, and that is expected to increase considerably over the next few years. This has brought the price of oil down from about $100 a barrel to $70 on Friday — a dramatic decline that will have a major effect on the global economy, including our economy.
But that is not all. The overlooked factor is that a nuclear deal with Iran would bring an end to UN sanctions against that country, which happens to be one of the world’s top four oil producers.
Lifting those sanctions would bring another big flow of oil onto the global market. One estimate is that it would bring the oil price down to $50-$60 a barrel.
The effect of that would be economically transformative. It would have a major damping effect on the threat of inflation in SA.
But we should also take note that it would have serious implications for Africa’s oil producers, which are the backbone of the continent’s economic upsurge that has made it such an attractive investment target.
Given that a good many JSE-listed companies are expanding their operations into Africa to take advantage of the rising purchasing power of communities there — and also as a hedge against our economic stagnation — this will also affect us.
The US began imposing sanctions on Iran way back in 1979 in the wake of the Islamic Revolution. The sanctions were expanded in 1995. The UN Security Council then imposed much more severe sanctions in 2006, when the aggressive regime of president Mahmoud Ahmadinejad refused to suspend Iran’s uranium enrichment programme.
The intensified sanctions targeted investments in Iran, exports of refined petroleum products, as well as business dealings with Iran’s Revolutionary Guards. Most effective were constraints on banking and insurance transactions.
The US has been able to impose these constraints on banking transactions by targeted countries through the relatively new Swift code system of bank identification.
The system, developed by Apple, requires all banks throughout the world to have a Swift code, which is registered in the system’s global centre in La Hulpe, Belgium.
The fifth and sixth characters in each code identify the country of origin of any bank making an international transfer. This makes it easy to identify and stop any transfer being made by a bank in or to a country under UN-imposed financial sanctions.
It is a powerful new tool, far more stifling that anything apartheid SA faced under international sanctions.
These sanctions have taken a heavy toll on the Iranian economy, to the point where, in elections last year, the Iranian people voted in reformist President Hassan Rouhani to replace the extremist Ahmadinejad.
Rouhani immediately began sending out diplomatic signals, to which Obama responded — despite opposition from Israel and the US’s Republican Party, which now controls the US Congress.
Obama has strengthened his hand by negotiating with the leaders of the other four permanent members of the UN Security Council — the UK, France, China and Russia — which with the US and Germany constitute what is now called "the 5+1".
The negotiations have been going on for some time and a deadline was set for Monday, November 24.
The negotiators didn’t reach agreement, but reported good progress and extended the deadline for seven months — with another key meeting between Iran and the 5+1 leaders due in March.
I believe a deal will be struck.
Obama badly wants to leave a legacy, and a nuclear deal with Iran would be his big achievement.
The Republicans will no doubt oppose him, as will Israel’s powerful Washington lobby, but Obama can use his executive powers to issue an order bypassing Congress if it objects. He has indicated a willingness to do so, provided, of course, that a satisfactory deal can be reached.
Rouhani certainly wants it, but he has a problem of a different kind. His powers as president are limited; the last word in all Iran’s foreign affairs lies with the Supreme Leader, Ayatollah Ali Khamenei.
Why I believe the deal will eventually go through is that the principal players, Obama and Rouhani, both want it badly. The legacies of both depend on it. And both know that if they fail there will probably not be another chance. It is now or never.
The implications of such a deal are enormous. Iran is one of the world’s top four oil producers, but sanctions have reduced its oil exports drastically.
To open its taps again, now that the oil price is tumbling anyway, would bring it way down and give the global economy a huge boost — the equivalent, according to David Hale, founder of a US-based global economics consultancy, of a $400bn tax cut.
Until recently, the oil price has been about $100 a barrel.
But with the US now producing more than 1-million barrels a day from shale, the Organisation of the Petroleum Exporting Countries’ ability to control the world price through manipulating production has been weakened, and the price has come down more than 30%.
Hale’s organisation reckons that if the Iran deal goes through and its oil comes on stream, the price will come down to between $50 and $60 a barrel — and that for every $10 it comes down, it will boost the global economy by 0.2%.
Nor is that all. Iran has 77-million people; it has one of the world’s ancient civilisations going back 6,000 years, and has a fairly well-developed economy.
If it were to be opened up to the rest of the world after 36 years of isolation, one can imagine a rush of foreign investors into the country whose normalisation could then transform the Middle East.
Obviously such a drop in the price of oil would bring welcome relief to our cash-strapped economy.
The oil price has been one of the strongest drivers of inflation in recent years. But, as I have said, there is a downside. Our African backyard, which has been enjoying a 5% growth rate, will take a nasty knock.
Countries such as Nigeria, Angola, Ghana and, more recently, Mozambique and Tanzania, are the growth points of that new African prosperity our more venturesome businesses have been tapping into.
If the purchasing power of the people of those countries takes a knock, so, too, will JSE companies that have moved in there so eagerly.
Which all goes to show that there are no easy bets in this tough old world.
- Rand Daily Mail
- Published on:
- December 3, 2014
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