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Iran's Fear of Low Oil Prices

The price of crude oil has hit an 8 month low, dipping to just under $90 a barrel. The decrease in price is being attributed to the global financial slowdown, which analysts believe will lead to a reduction in the consumption of gas. The decline in price should come as some relief to the average American and the numerous industries that are struggling to cope with the ripple effects of high energy costs.

Iranian leadership, however, view the decline in the price of oil with great concern. Speaking at the Second International Gas Conference in Tehran, a gathering that includes leading oil and gas producers, Iranian Oil Minister Gholam Hossein Nozari called on OPEC members to stabilize prices at over $100 a barrel. "A price of US$100 and below is not suitable for anybody, neither oil producers nor oil consumers... OPEC members need to respect their output quota to avoid a worsening of the oversupply."

At this point, Iran stands alone in its concern over the current price level for oil. But what is there motive? Is it simple greed - the higher the price of oil, the greater the revenues? To an extent, greed does play a role. However, there seems to be real fiscal concerns at hand for the Islamic Republic. Mohsin Khan, Director of Middle East and Central Asia at the International Monetary Fund, argues,

Iran’s break-even price is $90 a barrel, and that is a big issue in Iran right now. ... If prices dip below $90 a barrel, and we have seen it touch $89 earlier this week, then they would have to tighten their public expenditure policy, and probably cut subsidies, which would be an issue for the government there – the public would not be content.

For other oil producing nations, Khan believes break-even threshold is much lower. "The UAE will have a fiscal balance at an oil price of $23, if it goes below they would run a deficit. For Qatar, the break-even price is $24 a barrel." Saudi Arabia's standard of $49 a barrel is the highest amongst the Gulf Cooperation Council countries on account of its high spending "on a lot of projects right now, and oil money is used to fund these projects."

Iran's struggling economy might not be able to sustain a prolonged period of low oil prices. The economy is the primary issue in the upcoming presidential elections and the political factions are fractured over how to fix it. Seeing the strain that subsidies have put on his inflated budget, President Ahmadinejad is considering abolishing many of them - a move that could cause inflation to spike if not done slowly and cautiously (the official inflation number is already at 26%).

If there is a positive to take from the credit crisis fallout, this just might be it.


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