The Fuse

Iran and the Oil Price Crash: Will it Weather the Storm?

by Gregory Brew | April 23, 2020

Amid the oil price catastrophe and the COVID-19 pandemic, one thing has remained constant: the ongoing confrontation between the United States and the Islamic Republic of Iran.

And while other oil-producers, including the United States, will likely suffer sweeping economic effects from this latest collapse in oil prices, Iran may weather the crisis and emerge relatively unscathed.

Ironically, the U.S. policy of economic pressure on Iran, including measures designed to reduce Iran’s oil exports to “zero,” may be to Iran’s benefit, turning a global catastrophe into a moment of opportunity Tehran hopes to exploit.

Since 1980, Iran’s oil output has struggled to regain the former highs of the Pahlavi era, when exports exceeded 6 million barrels per day (Mbd). A combination of war, economic sanctions, lack of foreign investment and the Islamic Republic’s interest in constructing a self-sufficient domestic economy has kept Iranian oil exports at a lower level.

The 2015 nuclear deal relaxed the U.S. sanctions on Iran’s economy, permitting a recovery in oil production. In 2018, Iran’s oil exports exceeded 2.5 Mbd.

But in May, the Trump administration formally withdrew from the nuclear deal, promising to re-impose sanctions and vowing to reduce Iran’s oil exports to “zero,” in order to place financial pressure on the Islamic Republic.

The campaign appears to have worked. By August 2019, Iran’s oil exports had collapsed. President Hassan Rouhani, recognizing the new economic paradigm, announced the nation’s budget for the next fiscal year (March 2020-March 2021) would be less dependent on oil revenues.

The Rouhani government expected to sell roughly 1 Mbd at an average price of $50/barrel, realizing $18 billion in revenue. Sales of oil are expected to cover only 9 percent of total spending, compared to 29 percent of the previous year’s budget, according to the figures released in December 2019.

As Henry Rome of the Eurasia Group noted, these are optimistic figures. Iran exported around 400,000 bpd in 2019, with prices averaging about $63/barrel, though Iran sold at steep discounts to incentivize buyers. To meet its budget needs, Iran would need to sell at least 770,000 barrels per day at $65.

According to the latest reports, Iran’s exports in February were less than 250,000 bpd. Prices have fallen to around $20, with the Iran index hovering around $11-12/barrel. And yet, President Rouhani on April 22 boasted that Iran will lose less than other oil producers, “as our reliance on oil income has decreased.”

Rouhani’s comments came a few hours after President Trump warned that US Navy vessels would fire on Iranian boats patrolling the Persian Gulf.

Despite the nation’s major COVID-19 outbreak, which has killed at least 3,000 people, Iran has accelerated its campaign to push U.S. forces from neighboring Iraq. The assassination of General Qassem Soleimani in January 2020, which U.S. officials argued would “restore deterrence” failed in its intended aim. Cratering oil prices, the pandemic, and U.S. pressure has not effectively deterred Iran. Rather, Tehran has grown more bold.

According to Ariane Tabatabai and Colin Clarke, the Iranian government faces extraordinary political, social, and economic pressure. The internal discontent, evidenced by last November’s violent protests and the public outcry over the accidental downing of a civilian airliner in January, has been exacerbated by the country’s stagnant economic and the effects of COVID-19.

The Iranian leadership, however, sees the current global crisis as an opportunity. They hope to take advantage of the confusion in the United States, where COVID-19 has proven immensely disruptive, to expand their own regional position. “From Tehran,” the authors argue, “the United States looks at its weakest in years.”

The Iranian government is using the United States as a scapegoat, utilizing propaganda to blame the U.S. (as well as Israel) for creating and spreading the virus. Meanwhile, Iran continues to pressure the Iraqi government to force out U.S. troops. On March 11, a rocket attack killed two Americans. Last week, President Rouhani traveled to Syria to meet with President Bashar al-Assad—a symbolic meeting meant to represent Iran’s victory in propping up an ally, in the face of U.S. opposition.

The collapse in the global oil price will weaken Iran, just as it will every other oil producer. With its miniscule exports, Iran’s break-even to meet its stated budget needs now exceeds $300, according to Bloomberg. But the figures are misleading—evidence of how little Iran has come to depend on oil, compared to other OPEC members.

Without a doubt, the oil price rout will cause further suffering in Iran. Talk of the country’s endurance is coming from Rouhani and regime organs, and constitutes typical Tehran bluster, utilized by officials of the Islamic Republic in order to present a resolute front to the international community. The state budget will likely be further squeezed, as there is little chance the lofty aims of the December 2019 budget will be achieved.

But Iran, which has endured years of economic pressure, may prove more durable to the shock than its neighbors. And there is little reason to suspect that it will rein in its regional activities or de-escalate its aggression towards the United States.