31st USAEE/IAEE North American Conference Online Proceedings (Poster)
Title of paper/student poster:
Iranian Oil Embargo: A Dynamic Stochastic General Equilibrium Model-Based Analysis
Authors & organizational affiliation:
Jalal Dehnavi, Ferdowsi University of Mashhad and University of Vienna
Hossein Tavakolian, University of Tehran
Complete contact details for the lead author/student:
Name: Jalal Dehnavi
Title: PhD student of Energy Economics
Organization: Ferdowsi University of Mashhad and Vienna University
Address: Ferdowsi University of Mashhad (FUM) campus, Azadi Sq., Mashhad,
Khorasan Razavi, Iran.
Phone/Fax/Email: Phone: 98 (0)511-8802000/ Fax: 98 (0)511-8802000/ E-mail:
[email protected], [email protected]
31 ST USAEE/IAEE North American Conference / Transition to a Sustainable Energy Era: Opportunities & Challenges
Jalal Dehnavi* & Hossein Tavakolian#
*
PhD Student of Energy Economics, Ferdowsi University of Mashhad and Research visitor at the Faculty of Business, Economics and Statistics, University of Vienna
#
PhD Student of Economics, University of Tehran
Overview
The EU imposed an embargo on Iranian oil on 23 January, 2012 that came into full force in July, preventing the EU members from importing Iranian oil.
The embargo was enforced by the UN, EU, USA and other countries in the wake of Western pressure policies. Proposing different scenarios, the study
investigates possible consequences of Iranian oil embargo on Iran’s economy and that of the world. Besides, we present a two country Dynamic Stochastic
General Equilibrium (DSGE) model (a theoretical frame work) to show how Iranian oil embargo can affect Iranian and world economy. The results reveal
that Iranian oil embargo is a lose-lose strategy and will harm both sides.
Struture of the Model
Capital
Role of Oil in Iran Economy
Labor
Fig.1: Oil revenues’ share of Iranian government's budget revenue
Investmen
t
Household
I
Final good
Producer I
Domestically
produced good
Intermediate
good producer
I
Consumption
Subsidies
Imported good
Oil
I
Tax
Monetary policy rule
(money growth rule)
I
Government I
I Exports
DSGE Model:
The model we use in this study is a
modified version of Alves, et al.
(2007).
The model we use here is in some
aspects different from their model:
 First
and
the
most
important difference is that
they do not consider oil
market in their model (Add
oil to production functions)
 Second, we consider world
economy and Iran as two
countries for which the
structures of economies are
different.
Fig.2: Oil’s share of GDP in Iran in Recent Years
Monetary policy rule
(interest rate rule)
W Exports
W
Government
W
Oil
W
Imported Oil
Final good
Household W
Fig.3: Share of oil exports in the Iran’s total exports
Oil market
F
F
1
1


 (d F )1 F (Y IRIR,t )1 F  (1  d F )1 F ( tY WIR,t )1 F  , 0  d F  1




Financial intermediary
C
U IR ,t   IR
,t  j
85.00%
2009
67.00%
2008
86.00%
2007
1
1
C
1 C
[GIR
  0 IRL ,t  j
( LIR ,t  j (h))1 L
,t  j (C IR ,t  j ( h)  bC IR ,t  j 1 ( h))]
1C
1  L
1  QIR ,t  j (h)
Q
  1 IR

,t  j
1   Q  PIR ,t  j zIR ,t  j
68.00%
2006
PIR ,t GIR ,t  TRIR ,t  BIRIR,t 1 (h) 
1 Q
Scenarios
Decrease in
RIR ,t
  W ,tWIR ,t (h)
LIR ,t (h)
n
Pt O OIR ,t
St
O
ln OW ,t  WO ,t ln OW ,t  WO ,t   IR
,t
In this process,   1 means that a negative shock to oil supply
 DCIR ,t  DCIR ,t 1
of Iran in global oil market, i.e. Iranian oil embargo, can be
fully compensated by global oil supply.   0 means that
there is no way to compensate the oil supply loss of Iranian oil
embargo in the global oil market and any other value of  in
(0,1) shows the extent to which global oil market can
compensate the Iranian oil supply loss.
Decrease in
Iranian Oil
Iranian Oil
Iranian GDP
World Oil
Revenues (%)
(%)
Export (%)
17
13
4
1
42
32
10
2
77
58
17.4
4
100
75
22.6
5
Results
The impacts of the embargo on Iranian economy can be discussed from two perspectives:
1) Iran fails to find alternative customer(s) for its oil; 2) Iran could replace other countries
for oil exports to Europe. In the first case, the embargo would have direct consequences
for Iranian economy while the latter does not seem to have much effect on the economy.
On the other hand, embargo impacts on oil importing countries will be considerable. The
oil embargo represents three serious hazards to the oil importing countries: 1) the rise of
oil prices in global markets; 2) the decline of crude oil strategic reserves; and 3) in case of
an increase in oil prices, the prices of energy carriers would also go up. Given the high
energy import dependence in Europe, this would, in turn, spur public discontent. Given
the Western economic crisis especially severe for Greece and Spain, this could have
repercussions for these countries.
Sanction
US, European Union,
Japan and south Korea
US, European Union,
Japan , South Korea,
India and China
United Nations Sanction
Table 2: Different scenarios of sanctions on Iran’s oil exports and the impacts on
global oil supply
Countries name
Share in Iranian
Exports, %
Iranian share (%) in
Total Crude
Imported
18
European Union
14
10
Japan
13
11
India
10
10
South Korea
7
51
Turkey
4
25
South Africa
2
100
Sri Lanka
1
4
Taiwan
22
11
China
Table 1: Iran Crude Oil and Condensate Exports (2011)
Ot  OW ,t  (1  O )OIR ,t
BIRIR,t (h)
PIR,tYIRF,t  n( PIR,t CIR,t  PIR,t I IR,t  PIR,t GIR,t  PIR,tIR,t (uIR,t ) K IR,t )
Export (%)
US and European union
It is assumed that the oil produced in Iran and the world is
supplied in world oil market and all of it is demanded by foreign
firms. Let Ot be the foreign firms demand for oil in global oil
market, therefore we have
The log of oil production in world also follows an AR(1)
process. To see the effect of Iranian oil embargo on world
economy we consider a fraction,  [0,1] of the negative oil
supply shock of Iran into the world oil supply as follows:
Oil market
Decrease in
O
O
SIR
,t  S IR ,t 1  OIR ,t
O
O
ln OIR ,t  IR
,t ln OIR ,t   IR ,t
Market clearing condition
Decrease in
each period some of it is used by government, namely:
And it is also assumed that log of oil production in Iran follows
an AR(1) process as follows:
  C ,t PIR ,t CIR ,t  (1   O )
Positive: Iran Suffer from Dutch Disease, Sanction may Treat Dutch
Diseases in Iran.
S IRO ,t , in each country and



Government
76.00%
We assume that there is an oil stock,
SWO ,t  SWO ,t 1  OW ,t
WIR,t LIR,t  n[mIR,t M IR,t 1  QIR ,t ]
Households
2010
Intermediate
good producer
W
producer W
Goods producing firms
Y IRF ,t
World oil
constraint
Conclusions
 Oil sanction is a bilateral weapon that can harm both sides of the conflict, Iran and the
West. Due to an increasing global oil scarcity, punishing any of important producers will
inevitably result in a loss of some consumers’ welfare in those countries that apply
embargo on oil imports.
 In the worst case, both sides will have losses from sanctions. It might happen that Iran will
suffer more, but it also may happen that the political component of its utility is higher than
for Europeans.
 A change in oil prices would lead to change in inflation rate, government expenditures and
economic growth in different countries.
References:
Dehnavi. J & Yuri Yegorov, “Iranian Oil Embargo: Games with Different Scenarios”,
USAEE Working Paper No. 2054123, Date Posted: May 08, 2012.
Alves. N and et.al, “An Open Economy Model of the EURO AREA”, Working Papers,
Banko de Portugal, 2007.
Acknowledgment: Jalal Dehnavi is grateful to Prof. Dr. Franz Wirl
who has invited him for research visit to University of Vienna, where
this paper has been written. And Also Dr Yuri Yegorov for his
valuable comments that substantially improved this paper