x Abu Dhabi, UAEFriday 28 July 2017

Iran's state finances hit by plummeting oil income

Tightening western sanctions and sharply falling oil prices hit the state's oil income, as the resilience of ordinary people is tested by soaring inflation.

With inflation running around 20 per cent, ordinary Iranians such as these people shopping in Tajrish, north of Tehran, are feeling it in their pockets.
With inflation running around 20 per cent, ordinary Iranians such as these people shopping in Tajrish, north of Tehran, are feeling it in their pockets.

LONDON // Iran's state finances have come under unprecedented pressure and the resilience of ordinary people is being tested by soaring inflation as oil income plummets because of tightening western sanctions and sharply falling oil prices.

Tough financial measures imposed by Washington and Brussels have made it ever more difficult to pay for and ship oil from Iran. Its oil output has sunk to the lowest in 20 years, cutting revenue that is vital to fund a sprawling state apparatus.

Already down by more than a quarter, or about 600,000 barrels per day (bpd), from rates of 2.2 million bpd last year, shipments of crude oil from Iran are expected to drop further when a European Union oil embargo takes effect on July 1.

Tehran is already estimated to have lost more than US$10 billion (Dh36.7bn) in oil revenues this year.

Causing even more pain, oil prices fell below $100 a barrel last week to a 16-month low amid a darkening outlook for economies in Europe, the United States and China.

"This is an act of economic warfare. The sanctions are having a big effect in cumulative terms: Iran is being locked out of the global financial system," said Mehdi Varzi, a former official at the National Iranian Oil Co.

"It does appear that Iran is more amenable to negotiations now than it was a year ago. The West should take advantage of this momentary situation to offer more meaningful concessions - a road map to where this will all end," said Mr Varzi, who runs Varzi Energy, an energy consultancy in Britain.

Diplomats and analysts said Iran might offer the International Atomic Energy Agency (IAEA), increased cooperation as a bargaining chip in its negotiations with world powers, which resumed in April after a 15-month hiatus and are to continue in Moscow on June 18 and 19.

Basic mathematics dictate that the lower Iran's oil exports, the higher the oil price it will need to stay in the black.

According to the International Monetary Fund, Iran needs oil at $117 a barrel to balance its budget, set at $462 billion. President Mahmoud Ahmadinejad has said the budget was designed to decrease Iran's dependence on oil revenues.

Iranian oil officials have acknowledged that sanctions have reduced exports but said the country had long experience of finding ways around declining exports, and a drop in oil revenue is not the end of the world.

"Personally, I will be very happy if the dependence of the economy on oil revenue is decreased," said an Iranian oil official, who requested anonymity. "We can use the sanctions as an opportunity."

International sanctions have been a fact of life in Iran for decades and Tehran is adept at working round them. But there are growing signs that ordinary people are feeling much more pain from them than in the past as inflation has soared in the past six months.

"I was struck by the high prices when I went to the grocery store yesterday," said Ahmad, 54, who owns a small fabric shop in Tehran's bazaar.

He said the price of apples had more than doubled in the past month and strawberries had almost tripled to 110,000 rials per kilo, or more than Dh32 at market rates.

"Little by little, even fruit is becoming a luxury."

Inflation is officially running at about 20 per cent, although economists said prices of the goods most Iranians worry about are rising much faster.

The country is undergoing what the government has called major economic surgery, in the form of cuts to the multibillion dollar subsidies which for years have held down the price of essential goods such as fuel and food.

On the export front, several big European companies have halted purchases of Iranian oil and others are winding down business with the country.

Iran had hoped that energy-hungry China and India, both major customers, would mop up much of the surplus oil left by European clients. That might not be the case.

"Our impression is that China and India have not been as helpful as the Iranians expected," said a western oil executive, who declined to be identified.

"But it's very difficult to get a clear picture of how much oil is moving because they are deliberately cutting off communication."

Since early April, Tehran has been hiding the destination of its oil sales by switching off tracking systems on its tankers.

But barrels counted upon arrival in Iran's top four customers - China, India, Japan and South Korea - show a 20 per cent decrease this year, according to government data and industry sources.

That translates into a loss in revenue of roughly $35.7 million a day, or $4.3 billion in the first four months of this year, based on current Brent crude prices.

Iranian crude is sold at a discount of several dollars per barrel to benchmark dated Brent, so the actual losses are likely to be even higher.

Some relief has come from soaring prices earlier this year as Brent so far in 2012 is averaging $116 a barrel, up from last year's $110, which was a record high. But reduced output and falling prices are making things worse very quickly.

From July 1, Morgan Stanley expects Iranian exports to fall by a further 150,000 bpd while the International Energy Agency has said they could almost halve by 1 million bpd.

That is putting Iran on course for a massive drop in oil revenues, while those of its rivals from the Organisation of the Petroleum Exporting Countries (Opec) will hit a record high.

According to the London-based Centre for Global Energy Studies, the strong oil price has put Opec on a path to earn $911 billion from oil exports this year.

Iran - Opec's second biggest producer - could see a 39 per cent decrease this year to $44 billion, while Saudi Arabia is expected to see a $3 billion increase to $294 billion.

Belt tightening may be needed for Iran to withstand lower oil prices and exports after the EU sanctions take full effect.

"The only way around it will be for Iran to cut the budget, which has a lot of fat," said Mr Varzi.