Iranian-Oil-Free Zone and international oil prices

- We analyze the interconnections between Iranian oil supply and global oil prices.
- We use VAR modeling and annual data from 1965 to 2012 for the case of Iran.
- There are no inflationary effects of Iranian oil sanction on world oil prices.
- Non-Iranian oil supply offsets the missing Iranian oil in the market.

One of the main elements of economic sanctions against Iran due to its nuclear and military programs is crude oil exportation restrictions in addition to investment in Iranian energy related projects. Senders of such sanction are interested in understanding the impacts of such embargos on international oil prices. We apply unrestricted vector autoregressive (VAR) model, using impulse response functions (IRF) and variance decomposition analysis (VDA) tools with annual data from 1965 to 2012 to analyze the dynamic response of international oil prices to Iranian oil export sanction. Controlling for the supply of non-Iranian oil, the world GDP per capita, and post-Islamic revolution exogenous dummy variables, we show that international oil prices respond negatively and statistically significant to increasing shock in absolute negative changes of the Iranian oil exports - our proxy of Iran oil sanctions - following the first 2 years after shock. The main reason is the positive response of the non-Iranian oil supply to negative shocks in Iranian oil exports, filling the missing supply of Iranian oil in international markets.