Thursday, October 30, 2008

Iran and the price of oil

The sharp drop in oil prices (from $147 in July to the mid-$60s today, or a drop of more than 50%) may hurt Iran more than would sanctions.

A MEMRI analysis reports that, according to the IMF, the Iranians may need a minimum oil price of $95 per barrel to balance their national budget. While Iran has a stabilization fund to protect against a rainy day, President Ahmedinejad has apparently drawn it down for various reasons to a level of approximately $7 billion. That would just about cover gasoline imports (Iran produces a lot of oil but lacks refineries to produce gasoline) for a year at most.

Ahmedinejad's revenue-raising options are limited. His attempt to get OPEC to reduce production failed to meet his expectations, while domestic fiscal measures are risky. His recent attempt to increase domestic taxes met with such resistance that it had to be abandoned. Other alternatives, such as restricting consumer imports, aren't likely to be popular.

Meanwhile, the Saudis can balance their budget at around $50 per barrel. In addition, they have much heftier funds in reserve. Other Gulf States can live with even lower oil prices. Thus, they are well positioned to push back Iranian influence in the region.

The cloud that accompanies this silver lining: the report cautions that Iranians could seek to provoke a regional crisis as a means of jacking up oil prices.

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