Iran is currently facing its worst economic and existential crisis yet, as it struggles to battle its alarmingly high rate of coronavirus cases amidst crippling US sanctions and an omnipresent sense of political unrest. Can the Islamic Republic survive the Saudi-led global oil price crash, and what implications does this have on the country’s worsening economic and political situation?
What is the oil price crisis?
Earlier this month, global oil prices tanked by as much as 30%, reaching an 18-year low after Saudi Arabia dramatically slashed its prices for crude oil for its buyers. This move was made in retaliation to Russia's refusal to cut its production, contrary to a deal by OPEC producers after the coronavirus prompted a drastic decline in the global demand for crude oil. Worst yet, the Kremlin responded by slashing prices even further.
While both Saudi Arabia and Russia can, to a certain extent, afford an economic war of this scale–Riyadh has foreign exchange reserves of $490 billion, while Moscow has $440 billion–Russia is at an advantage due to years of stockpiling reserves. According to the International Monetary Fund (IMF), Russia can comfortably survive with oil at $42 a barrel, while Saudi Arabia may need assistance to fill the gap between its spending and revenue if prices fall below $82 a barrel.
But the struggle for an oil hegemony isn’t just bilateral–US President Donald Trump has also had a shaky relationship with the OPEC ever since his administration unilaterally withdrew from the nuclear deal with Iran in May 2018. For Russian President Vladimir Putin, the current crisis seems like an opportune time to rid the world of US-produced shale oil and replace the big powers with its own production, especially in Asia, where the coronavirus has created fiscal uncertainty and particularly with China, whose reliance on the US has nearly disappeared after Trump announced a trade war against it in 2018. For Saudi Arabia, too, ridding the world of its dependence on American shale would be a massive advantage.
Over the past few weeks, the severe ramifications of the oil price crash at a time where America has just about established its role as a leading global oil producer has completely shifted Trump’s calculus. To survive, the American oil industry is cutting dividends, slashing spending, and preparing for layoffs. Wall Street, which is already overburdened by the coronavirus mayhem, is witnessing a crumbling of energy stocks, while energy junk-bond yields are spiking.
But this epic battle for domination among Saudi Arabia, Russia, and the US–with Russia now intentionally lowering prices to derail the American shale boom and Saudi Arabia ‘punishing’ Russia by increasing production during a global pandemic–has been quite detrimental for other oil-dependent countries in the Gulf Cooperation Council (GCC). Guy Burton, a former assistant professor at Dubai’s Mohammed bin Rashid School of Government and an adjunct professor at the Vesalius College in Brussels said, “Since the last oil price cut, the GCC has burned through foreign reserves, but they rode it out. The discussion now is that they can’t do it this time.”
And he is right–the GCC has often used its surpluses to keep their extremely consumerist economies afloat and have also used these reserves to fund diversification programmes to make their economies less oil-dependent, as laid out in the Vision 2030 programmes by Riyadh, Doha, and Abu Dhabi. But the GCC’s financial situation has become so risky that the IMF in February warned that "the region's aggregate net financial wealth, estimated at $2 trillion at present, would turn negative by 2034 as the region becomes a net borrower". It is projected that even with oil prices at $100 a barrel, wealth in the GCC would be exhausted by 2052, while a real price of $20 a barrel would bring this even further forward–to 2027. This analysis comes, of course, against the backdrop of the COVID-19, which has forced Riyadh to cancel the highly lucrative Umrah pilgrimage and has left Dubai in a lurch with respect to its highly anticipated World Expo 2020.
In a sense, while the Saudi price cut was initially aimed at pressuring US shale, it has now become a tool to pressurize states in the region to become more subservient to the Kingdom. If oil prices reach a level where it is no longer possible to balance state budgets in the GCC, this can become a major negotiating tool between the richer and weaker states in the region.
Implications for Iran
Given the major blow that the oil pricing crash has had on the economic prospects of already wealthy nations, it is imperative to look at Iran’s position in the crisis. In the past year, Tehran has struggled to deal with massive losses to its oil trade and revenue. Thanks to US sanctions, its oil exports in 2018 shrunk to less than a fifth of its 2017 average–from 2.5 million barrels a day to a mere 0.5–and its GDP, too, seems to have shrunk by 9.5% in 2019 following its negative growth of 4.8% the previous year. The country has also been hit by high inflation rates of more than 35%, which has significantly reduced purchasing power.
Further declines in oil prices are likely to constrain the Ali Khamenei-led administration’s ability to sustain spending on welfare and will most definitely hamper the country’s already meagre ability to fight the coronavirus, which has ravaged the country with more than 24,000 officially confirmed cases and over 1,900 deaths. The country’s inability to curb the spread of the virus is a result of the sheer incompetence and dishonesty of Iranian officials and their healthcare policies, doubled with renewed American sanctions and the withdrawal of aid. A shining example of this is Khamenei’s dismissal of an American offer for aid on Sunday and his backing of a Chinese conspiracy theory on the origin of the virus.
As a result, for the first time since 1962, Tehran approached the IMF for an emergency fund of $5 billion to deal with its crises. Iran’s fiscal break-even oil price is the highest in the world–it needs the price per barrel to be $194.6 to balance its budget. At a time when oil is globally priced at around $30 a barrel and the country is a COVID-19 hotspot under US sanctions, there is a growing wave of social instability that can add further fuel unrest in the country, witnessed last year, especially if Khamenei cuts social spending to protect the country’s budget. Iranian President Hassan Rouhani’s attempt at transitioning to a welfare-based economy by removing subsidies last year was met with violent demonstrations that were crushed using brute force by state security forces.
But, ironically enough, Iran may not be as badly affected by the oil pricing flux as its peers in the Gulf since the dependency of its government budget on oil export revenues has reduced significantly, to a low of 30%, since it underwent a sanctions-induced oil revenue shock in 2018-19. Iranian Oil Minister Bijan Namdar Zanganeh said that the country has “no important reliable oil-exporting avenue, not because of the coronavirus, because of the sanctions.”
Despite this tepid insulation, Iran is no longer in a position to create any ripples in oil pricing since its usual response of attacking oil infrastructure and shipments will not be effective in a world awash with cheap oil, much to the delight of American producers. The real threats to Iran's existence continue to be American sanctions and the questionable decisions of its Supreme Leader. Most recently, it was revealed that Trump’s former national security advisor, John Bolton, and his friends urged big pharma to end business with Iran at the neoconservative group, United Against Nuclear Iran, focusing specifically on companies specially licensed to trade with Iran under a humanitarian exception. At the same time, Iran is under the global scanner for its opacity and gross misreporting of the severity of the coronavirus crisis within its borders. It is no secret that the financial losses incurred by Tehran due to US sanctions have crippled its already fractured healthcare system and its ability to improve its medical facilities at a similar rate to other countries to combat the coronavirus. However, the lack of strong and transparent political leadership has further compounded these uncertainties.
Khamenei’s continued insistence that Trump has failed in his maximum pressure campaign, his government's simultaneous reluctance to reveal the real numbers of its oil exports and deficits, and his proven inability to curb the spread of the COVID-19 have all led to severe destruction for the most vulnerable in Iranian society and left little room for international intervention or recourse. Therefore, while Iran may be relatively protected from the shocks of the current global oil pricing crisis, its stubborn leadership can prove to be a major impediment to handle such global market fluctuations, crippling US sanctions, growing civil unrest, and the havoc being wreaked by the novel coronavirus.
Image Source: Reuters
Can Iran Survive the Global Oil Price Crash?
March 26, 2020
