Iran’s mission to make the most of oil wealth

Despite some predictable vapouring from hardliners, the Islamic regime in Tehran will mainly be heaving a sigh of relief that Israel did not attack Iran’s oil infrastructure.

The IAF avoided the main oil terminal at Kharg Island in the north of the Gulf, major refineries such as Abadan – there are 10 main refining sites in the country – and the operational nuclear power station at Bushehr. That may change if either side escalates.

The regime will be happy, of course, because oil exports have re-emerged to fund the Iranian economy – despite heightened sanctions. In truth, sanctions against Iran have been heightening since 1979 – with variable results.

Step forward the Biden administration, which has been notably relaxed about Iranian oil, much to the delight of the regime, one suspects. True, exports slumped somewhat in the immediate aftermath of Iran’s missile strike on Israel on October 1 as the Iranians withdrew some tankers from Kharg. But generally, they have been edging up to hit 1.8 million barrels per day (mbd).

Analysts think the Iranian regime has further developed its unholy mix of unregistered tankers and shell companies to disguise exports. But that takes little account of tougher military enforcement, as may be the case if Donald Trump wins the White House. Of several regional states that will be nervous if Trump gets back in, Iran has to be top of the list.

But there are underlying problems that mean Iran does not benefit fully from its hydrocarbon wealth

The Israeli strike came days after Masoud Pezeshkian, the president, announced a draft budget, his first since taking office in July. Pezeshkian and his team are predicting that oil, gas and oil products income will grow 32 percent  compared with the present year and that crude production will hit 3.75 mbd. The Iranian financial year runs March to March. Total crude production was 3.33 mbd in the third quarter, according to the US Energy Information Administration.

It is the higher oil production – and export – numbers that are presumably behind a revised IMF projection that, despite the more than year-long conflict, the Iranian economy will grow by 3.7 percent, up from a previous 3.3 percent.

But there are underlying problems – aside from the prospect of more missiles – that mean Iran does not benefit fully from its hydrocarbon wealth.

Iranians pay some of the lowest costs in the world for their petrol – less than 3 US cents for a litre of gasoline and less than 1 cent for diesel and kerosene, according to globalpetrolprices.com. This is effectively free. Pezeshkian inveighed the cost of subsidies in his budget speech.

Aside from energy, ordinary Iranians will be much concerned by the decline in their purchasing power

In 2019 the Raisi government tried to raise these prices but the sudden decision sparked riots in which more than 200 died.

Little surprise, then, that Iran is likely to have to import petroleum products and gas from neighbours such as Turkmenistan. True, it does also export some gas to Iraq and Turkey, but it needs to import. As our columnist Robin Mills has said, there is plenty of spare capacity in oil around the place if Iran is shut out. The tight market is gas. (Forgive the pun.)

Aside from energy, ordinary Iranians will be much concerned by the decline in their purchasing power. In the open market the rial actually strengthened slightly to $1 to IR685,000, having flirted with IR700,000 in the days before the Israeli strike. This is nonetheless a pitiful 35 percent decline over 10 months.

At the beginning of the year a dollar bought Iranians IR506,500, according to Bonbast, a website that tracks the rial. The site, by the way, converts using the toman – 10 old (or 10,000 new, official) rials.

There is also an official rate at which essential goods such as medicines can be bought. Unifying the exchange rate was one of the election themes of President Pezeshkian but that task has eluded his predecessors and it looks like eluding him.

A weakening rial feeds into inflation – another theme Pezeshkian referenced strongly in his election campaign. The IMF thinks inflation will fall from 40 percent in 2023 to 32 percent this year.

The Islamic republic is not alone in suffering from punishing price increases – Turkey and Egypt are struggling with high double digits – but inflation has persisted in Iran for a long time. The Iranian parliament research centre says that 30 percent of the population of 88 million is living in poverty.

And the rate of price increases is still higher than lending rates of 18 percent. This does not look enough to provide savers in Iran with incentives to leave their money on deposit. So, they buy gold.

What of Israel? Moody’s downgraded the Jewish state in September but still has the country at Baa1 albeit with a negative outlook; S&P followed shortly and similarly downgraded it to A from A+. Remarkably, the IMF is still predicting economic growth of 0.7 percent for Israel and inflation of only 3.7 percent.

James Drummond is Editor-in-Chief of AGBI. This article first appeared in his weekly newsletter – register here