Global oil prices falling, what should Iran do?

By: Sara Rajabova

The Organization of Petroleum Exporting Countries’ decision to keep oil production quota unchanged continues to cause trouble for the oil-producing countries.

Iran’s oil minister has recently said Tehran, which depends on oil and gas revenues, has refrained from protesting the OPEC’s decision to maintain group solidarity.

Despite pressures on OPEC’s member states, it decided to keep oil production at the level of 30 million barrels per day.

“I don’t think that the decision is beneficial to all OPEC member countries because some countries in OPEC were against this decision,” Shana quoted Oil Minister Bijan Zanganeh as saying, citing an interview he gave to CNN.

After the OPEC’s decision, the prices of oil are continuing to drop in the market. The oil prices that started to fall from June have hit its lowest rate since four year. According to the Bloomberg, the Brent price has fallen to $68.23 per barrel and WTI to $64.45 per barrel.

The continuing sharp drop in global oil prices is another hurdle for the Iranian economy after its failure to clinch a nuclear deal with the world powers. The negotiating sides agreed to extend the talks for further seven months. This means Tehran has to endure the international sanctions for another seven months if they fail again to reach an agreement before the deadline.

In the meantime, Iran’s Asian export fell below 1 million barrels per day (bpd) for a second time this year, according to Reuters. Last year’s interim agreement that eased some sanctions on Iran allowed it to keep export at about 1 million bpd, down from 2.2 million bpd before imposition of tough sanctions in 2012.

All these factors will have a significant impact on Iranian economy, which has been experiencing great difficulties in recent years.

Kamran Dadkhah, a professor of economics at Northeastern University in Boston city of Massachusetts State, told AzerNews that the fall in oil prices will complicate the situation for Rouhani government.

“The talks with the P5+1 did not reach a comprehensive agreement. It was expected that the breakthrough would bring sanctions relief resulting in more oil exports, foreign investment, and easy access to the international financial network. That didn’t happen so Iran’s oil exports will stay at about one to one a half million barrels a day. The Iranian government had counted on $100 a barrel price of oil; a reduction of $25 per barrel, reduces the country’s revenues between 9 to 13 billion dollars a year. This is not a good news,” Dadkhah said.

Meanwhile, a target price for oil in Iran budget for the next year will be about $ 80 per barrel. IRNA quoted Gholam Tajgardun, Head of the Planning and Budget Commission of the Iranian Parliament as saying that the parliament has already sent its proposals to the government on the target price for oil. “The trend of falling oil prices seems to be preserved, so that we do not expect a price increases in the near future,” Tajgardun said.

The fall in oil prices in the world markets has caused anxiety in Iran in connection with a possible budget deficit in the current Iranian calendar fiscal year, which ends March 20, 2015. Therefore, the sanctions-hit country considers various scenarios out of the situation due to the unstable oil prices.

Commenting on the ways of out of the difficult situation, Dadkhah said the government can not do anything but just hope for a better future.

“Oil revenues constitute the main source of government income, foreign exchange earnings, and savings for the country. As far as the government budget is concerned, it is suggested that the government increases tax revenues by forcing the institutions and companies owned or close to the centers of power to pay their taxes, by increasing tax rates, and by reducing the unnecessary expenditures such as financial aid to religious centers, and stop paying subsidies to families who earn above the poverty line,” the expert said.

He considered that while these are reasonable policy recommendations, they are hard to be implemented.

“On the other hand, as far as foreign exchange earnings are concerned nothing can be done in the short run. Any attempt to diversify Iran’s exports or increase its capacity beyond two million barrels a day requires heavy investment and can be achieved in the long run,” Dadkhah said.

Oil prices have reduced to its lowest level in recent times due to an increase in production by certain states and low economic growth of developed countries. Some experts believe that the oil prices will keep on falling but there are some predictions that it would not drop further as it has already reached its lowest level.

“By my estimate, the oil price would not fall further. Indeed, I believe it has reached the lowest level. The reasons behind the trend are that any further drop would make shale oil extraction, which has been an important source of increase in supply, unprofitable. Hence a further drop means a reduction of supply. Second, despite bad news from Europe and Japan, the American economy seems to be doing fine. The latest report by the Bureau of Economic Analysis (U.S. Department of Commerce) shows that the U.S. GDP grew in the second and third quarters of 2014 by 4.6 percent and 3.9 percent, respectively. Thus, with an increase in demand and no change (or even reduction) in supply, it seems we are close to the bottom of oil price,” Dadkhah said.