Saturday, October 25, 2008

Iran's Oil Price Vulnerability

BBC News | For every dollar on the price of a barrel of oil, Iran earns approximately a billion dollars a year. In the past few weeks and months, the price of Iranian oil has dropped between $50 and $60 a barrel.

The head of the Central Bank of Iran has warned that revenues could be cut by $54bn, effectively halving the country's income from oil, which accounts for the vast majority of both its export earnings and government revenue.

Petropars, a subsidiary of the National Iranian Oil Company (NOIC), has even warned that it could go into bankruptcy.

As the effect of those lower oil prices works through, Iran will face a growing budget deficit. The International Monetary Fund said in August that Iran would face unsustainable deficits should prices for its oil fall below $75 a barrel.

Mr Ahmadinejad will have the choice of cutting spending or printing more money. But with inflation already over 25% and unemployment around 10%, neither is an attractive option.

As Iran confronts the world over its controversial nuclear programme, high oil prices have been the insurance policy.

When oil was nudging $150 a barrel, it knew the world did not dare risk pushing prices even higher by imposing tough new sanctions, let alone military confrontation. That all looks very different now.

The strongest tool in the armoury of the US and Europe may be to impose an embargo on petrol sales to Iran.

If Russia blocks agreement at the UN Security Council, they could act unilaterally, or multilaterally.

Amazingly, this oil rich country is heavily dependent on petrol imports because of a lack of refinery capacity.

Iranians love their cars and any restriction on their freedom to drive will not make them happy. Low oil prices make this a distinct possibility.

At the very least, the global credit crunch means there is simply not the money in the global economy for the sort of multi-billion dollar investment that Iran needs for its oil and gas fields.