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Rising Oil Prices Create Political Cushion for Iran

by FAREED MOHAMEDI

07 Mar 2011 20:24Comments
OilMehr11Mar.jpg[ primer ] Oil prices have risen worldwide because of political unrest and upheavals in the Middle East. How has Iran been affected by the turmoil in oil sales?

The sudden rise in oil prices amid uncertainty and upheavals in the Middle East could create a political cushion for Iran. Prices are likely to remain high and volatile as long as protests, and concerns about supply disruptions, continue across the region. The global economy has limits on what prices it can handle. But Iran will clearly benefit multifold from higher prices, especially given its own economic problems.

A year ago, Iran's oil was priced at less than $80 per barrel, which produced revenues of over $53 billion during the course of the year -- with extra revenues of an estimated $9 million per day for every $5 per barrel increase this year.

The supply interruption out of Libya has helped increase the oil prices to over $110 per barrel. This is in stark contrast to the prices that dropped below the $40 per barrel lows in late 2008, but still well below the peak of almost $150 per barrel in mid-2008.

There has been no change in the volume of Iran's oil production. Physical disruptions in the Middle East -- such as the current supply interruption in Libya -- can potentially enhance Iran's sales program through both increased prices, and the ability to sell crude that it has stockpiled owing to it being overpriced by the National Iranian Oil Company. Longer term, Iran is unlikely to increase its crude oil production, since sanctions have made it more difficult to secure the requisite technology and expertise.

What impact do higher oil revenues have on Iran economically?

Higher oil prices will result in increased revenues and a bigger national budget, allowing Iran to increase its foreign exchange reserves. Oil money accounts for about 27 percent of Iran's total revenues, while crude oil accounts for 83 percent of the total value of exports.

What impact do higher oil revenues have on Iran politically?

Higher oil revenues may help the regime increase its welfare services and thereby improve its political position in the country. The government has recently implemented a subsidy reform program that compensates price hikes with cash subsidies to the bulk of the population. More oil revenues can help ensure the flow of cash handouts, at least in the early stages of implementation. But the government will need to avoid a spending spree, which can lead to inflation.

Iran has the world's third largest oil reserves and the second largest gas reserves. It is also the fifth largest global producer of oil, after Saudi Arabia. What role is Iran playing or likely to play as oil increasingly becomes a factor in the regional crises?

The regional situation and the threat for greater oil supply disruption and oil prices may reduce the enthusiasm with which Europe and the United States push for an oil embargo on Iran.

Iran's main gas field -- and the world's largest -- is the offshore South Pars field in the Persian Gulf, a shared field with Qatar. But parts of the field are still under construction. Are the events in the Gulf a source of concern for Iran when it comes to the development of South Pars?

Political events in the Gulf are unlikely to affect development of the South Pars gas field. The pace of that development depends on Iran's funding ability and its relations with foreign companies. Iran's main problem is the declining interest by foreign companies to invest in the South Pars project. China's CNPC remains the sole non-Iranian company known to be working on the field. CNPC replaced France's Total, which left in 2009.

Where does Iran's oil and gas industry stand compared with a year ago? What is Iran doing to expand the production and export of its natural gas and crude oil?

Iran's energy industry has seen little improvement over the past year, with the Shell/Repsol deal halted and ENI announcing it would pull out of the country after the expiration of the Darquain project. In early 2011, Iran announced a deal with Syria and Iraq in which Iran would export gas to the both countries. But this large project will stretch more than 1,200 miles and, even under the best scenarios, cross-border pipelines could take years to bring into commercial operation. It is unlikely that this project, a result of Iran seeking to monetize its substantial gas reserves, will be in operation anytime soon, and sanctions pressures will serve to extend the project timeline.

Iran continues to import gas from Turkmenistan to meet its domestic demands. But Tehran has managed to curb domestic demand for refined products from subsidy cuts on gasoline and diesel, with gasoline falling from about 56 million liters per day to a little under 48 million liters per day.

Due to international sanctions, foreign companies are now less interested in investing in Iran's energy sector or engaging in financial transactions with Iran. In December 2010, the Indian Reserve Bank suspended transactions with the National Iranian Oil Company (NIOC) and a financial clearinghouse. India's decision largely stemmed from pressure by the United States, which believed that Iran had been using the clearing house as an intermediary to bypass sanctions. But after two months of negotiations, the Indian bank reversed its decision in early March. India announced it would begin making overdue payments to Iran for crude oil. India's latest decision has undermined the sanctions push by the United States.

Fareed Mohamedi is partner and head of oil markets and country strategies at PFC Energy, a Washington, D.C.-based oil and gas consultancy. This article is presented by Tehran Bureau, the U.S. Institute of Peace, and the Woodrow Wilson International Center for Scholars as part of the Iran project at iranprimer.usip.org.

related reading | Iran Primer: The Oil and Gas Industry | Iran Primer: Oil and Gas Charts

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