Robin M. Mills, head of consulting at Manaar Energy and author of The Myth of the Oil Crisis.
Oil prices affect Iran in the short, medium, and long terms, albeit in different ways. With a budgetary break-even price of $131-36 per barrel,1 Iran appears to be one of the most vulnerable countries to lower prices. Already, the budget for the fiscal year beginning March 2015, which assumed an export oil price of $72 per barrel, is out of date with Brent crude oil now trading around $50 per barrel.
But Iran’s oil income had been hurting long before prices began dropping in June 2014. Oil production already had fallen from 3.58 million barrels per day (bpd) in 2011 to 2.77 million bpd in December 2014 due to sanctions. Even without them, Iran’s oil production was set to decline due to the accumulated effect of maturing fields and past underinvestment and mismanagement.
Now with cheap oil available elsewhere, Iran’s attractiveness to customers willing to brave sanctions has diminished. The oil Iran does manage to sell below the radar will fetch lower prices. At the same time, its deposited revenues in accounts in India, China, and elsewhere, which can only be bartered for goods from these respective countries, will buy less. If there is no deal over the nuclear program, Iran faces the prospect of low oil prices exacerbating the slow deterioration of its oil sector, along with continuing economic stagnation.
But with minimal foreign debt and a rather autarkic economy, Iran is less vulnerable to an external debt or currency crisis than either Russia or Venezuela. Iran’s devaluation, though inflationary, has made its non-oil exports more competitive. Additionally, its population, though certainly unhappy about persistently high unemployment and inflation, has become accustomed to economic hardship. The contractionary budget for the fiscal year beginning March 2015 already plans for spending cuts alongside increases in tax and privatization revenues.
Lower oil prices could also be offset by rising oil exports should there be a gradual easing of sanctions following a deal on Iran’s nuclear program. Yet even these would not earn the lost revenues Iran would have expected in the middle of last year. Complicating things further, recovering Iranian output would keep global oil prices lower for longer, and oil minister Bijan Namdar Zanganeh has made it clear that Iran will seek to regain its lost market share, “even if the price drops to $20.” This would have an even greater impact if combined with continuing production gains in Iraq.
These two factors together would create an interesting dynamic within OPEC. Iran and Iraq, two political allies with the largest and lowest-cost conventional reserves after Saudi Arabia, would be challenging their rival in Riyadh—a contest the Saudis have historically always won, though at a cost. But at the same time, Tehran and Baghdad would be scrambling for each other’s market share.
In some ways, however, lower oil prices may actually work in Iran’s favor. A post-sanctions Iran would seek to attract foreign investment to rebuild its oil production capacity and grow gas output further. Its large, low-cost fields have gained in relative attractiveness versus high-cost ventures in U.S. shale, deepwater drilling, or the Arctic. Its proposed contract, now in the drafting stage, which offers investors a fixed fee of a few dollars per barrel, was unappealing when oil sold for $100 per barrel but appears steadier and more enticing at $50.
But regardless of the price of oil, Iran has advantages in the longer term to help it ride out a prolonged slump better than the monoculture economy of its rival Saudi Arabia. Iran has a relatively diversified economy with a sizeable (albeit ramshackle) industrial base, the world’s largest or second-largest gas reserves, a large and well-educated population, and a highly strategic location nestled between the Persian Gulf and the Caspian Sea. Additionally, Iran is not plagued by the desperate security challenges of Iraq, Libya, or Nigeria.
In many respects Iran resembles Russia more than it does Saudi Arabia: the threat of oil prices is more stringent in the short term, but more manageable in the long run. At 30 percent, oil is a smaller share of Iran’s GDP than Saudi Arabia’s (45 percent), Kuwait’s (nearly 50 percent), and Qatar’s (50 percent). Driven by the urgent need to diversify away from oil earnings, a political and economic re-opening, genuine privatization of some state entities, and accessibility to foreign investment, Iran could experience an economic boom like that under President Rafsanjani following the end of the 1980–88 Iran-Iraq War.
1. Estimates by Citigroup, Reuters, IMF ↩