18 January 2016
by AFR

Iran deal welcome but bad for LNG

Iranian President Hassan Rouhani was elected in 2013 pledging to end the sanctions that were crippling the nation's economy.

The re-emergence of Iran into the global economy on Saturday with the lifting of crippling international sanctions that were in place for years is a welcome step forward in an area where the news is often grim – as emphasised during the surprise visit of Malcolm Turnbull to troops in neighbouring Iraq.

But the real significance of this event is the likely effect on already low oil prices now that Iran is free to sell the output of its extensive reserves, and that may affect Australia's exports of LNG, for which spot prices have also slumped. There may well be knock-on effects on commodity prices generally.

Although the US sanctions against Iran remain in place and are unlikely to be removed by the Republican-controlled Congress, foreign investment and the ability to trade internationally should boost the moribund Iranian economy, as well as the presidency of Hassan Rouhani,​ who was elected in 2013 pledging to end the sanctions. It will also boost oil production.

Iran was the seventh-largest oil producer in 2014, but bartered that output for products from countries that did not bother with sanctions, including China, India and South Korea. However, Iran's new ability to ask for the going price has already caused oil prices to fall below $US30. They fell 30 per cent in 2015.

Analysts have raised concerns that the fall in the oil price may be about lack of demand, but they also note that the decline in prices cannot be matched to any apparent change in activity in the West or China. Instead, it is thought that oil traders are pricing in the emergence of Iran into the oil market, with the resulting low prices likely to have mixed implications for the Australian economy.

As National Australia Bank chief economist Alan Oster​ wrote in this newspaper at the weekend, one result will be lower petrol prices and a boost to growth, but another will be to hamper prices for liquefied natural gas, of which Australia is now a major producer. Spot prices for LNG have slumped 60 per cent over two years and are expected to fall to $US7 per million British thermal units early this year.

The decline in oil also raises the broader question of the decline in all the other resources, notably coal, which Australia exports.

Another potential major exporter is Iraq, but as Mr Turnbull's visit and call for European countries to "step up" with more help to defeat Islamic State illustrates, the oil industry there – Iraq's reserves are on a par with those of Iran – will not be freed up for years. An Iraq free of IS would be welcomed by all, but Australia would have to face a future of low LNG and coal prices as a result.