the Iran-Royal Dutch Shell Scenario

The oil industry is an immensely complex organism. Oil is one of the world’s most valuable and most limited resources. It is found throughout the world, in many different nations. These nations are not always on the best of terms, which can make negotiations over payments very tense. 

Numerous political sanctions on Iran by countries in Europe and North America are what can cause problems when dealing with Iranian oil. Right now, Royal Dutch Shell, based out of the Netherlands, owes significant amounts of money to the National Iranian Oil Company, and is struggling to pay it, because of the sensitive political climate involved.

Due to political circumstances, caused by Iran’s attempts to get a nuclear program off the ground, there are problems in trading within the oil industry. Since the government has stepped in and caused detrimental effects to oil trading, the Coase theorem cannot be applied. Transaction costs are incredibly high, so even though the property rights are relatively simple, the trading is not pareto efficient. 

In fact, the transaction costs are massive for the Royal Dutch Shell company. The company owes Iran over 1 billion dollars on a single bill, and are running out of time to pay it off. The company is stopping trade with Iran now, because they do not want the bill to get any larger. 

Shell isn’t the only company to face this problem. Just last year, a French company, Total, shut down trade with Iran  because of the issues of political sanctions making trade more difficult.

 http://finance.yahoo.com/news/exclusive-shell-scrambles-pay-huge-100856324.html