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Iran's economy declines as sanctions bite

May 1, 2013 at 5:23 PM   |   Comments

DUBAI, United Arab Emirates, May 1 (UPI) -- Western sanctions on Iran, the most severe it's ever faced, are biting deeper than ever, U.S. statistics indicate, with Iranian oil exports tumbling to a 26-year low only weeks before a presidential election.

But even as inflation steadily rises and the Iranian currency slides, the Financial Times says that Tehran's making up some of its losses through higher oil prices.

The U.S. Department of Energy estimates that Iran's shrinking oil exports earned $69 billion in 2012, down 27 percent from $95 billion in 2011.

The International Energy Agency, a Western watchdog body, has estimated Iran lost more than $40 billion in export revenues in 2012, amounting to around $2.4 billion a month.

With payments for oil exports effectively blocked, Tehran has begun trading oil for goods. India, a major buyer, pays only in rupees.

Even so, the Islamic Republic, once the second-ranked oil producer in the Organization of Petroleum Exporting Countries, after its regional rival Saudi Arabia, is reported to be storing millions of barrels of oil in supertankers anchored in the Persian Gulf.

This is a seasonal occurrence but this year the volume of crude being stored is unusually high because of a lack of buyers in Asia, the Iranians' key market, due to the sanctions imposed in mid-2010 by the United States and the European Union.

"At some point, Tehran will be forced to cut already low production," the Financial Times noted.

Things are likely to get worse quite quickly, heightening political tensions as the country moves toward the presidential election, six weeks away.

The election is being held amid a power struggle between Iran's ruling conservative elite, headed by Supreme Leader Ayatollah Ali Khamenei, and followers of the outgoing two-term president, Mahmoud Ahmadinejad, who are challenging the cleric-dominated revolutionary Old Guard.

With millions of Iranians hurting from the sanctions, the rial in freefall, food prices going up and unemployment estimated at 17 percent, there are fears the election will trigger widespread public discontent.

A new round of sanctions, aimed at forcing Iran to abandon its purported quest for nuclear weapons, took effect in April. They're aimed at tightening the chokehold on Iran's vital oil exports, the backbone of its economy, by preventing Tehran from repatriating oil revenues from its major Asian customers like India, Japan and South Korea.

The European Union has clamped down by banning European insurers, and re-insurers, from covering refineries that process Iranian crude.

The U.S. Energy Information Administration says these measures are "particularly effective in stemming Iranian exports."

The agency estimates that Iran sold around 1.5 million barrels of oil per day abroad in 2012, the lowest volume since 1986 and 25 percent lower than the 2.5 million bpd listed in 2011. A few years ago, Iranian output was around 3.5 million bpd.

Despite the degree of progress reportedly achieved in recent talks between Iran and the U.S.-led Western powers responsible for the sanctions, there's no expectation of a breakthrough on the thorny nuclear issue in sight.

So the sanctions will continue to steadily grind down Iran's economy and that means that the country faces the prospect of long-term damage to its production capacity as it shuts down wells.

The IEA defines sustainable production capacity as oil production held in reserve that can be activated within 30 days and sustained for at least three months.

It's not at all clear how far the Iranians have closed down some oil output. But its energy industry, which desperately needs foreign investment to upgrade oil and gas fields, faces the prospect of permanent damage.

As it is, production has never really recovered from long-term neglect and the impact of earlier sanctions that seriously undermined its ability to maintain the levels that existed before the 1979 Islamic Revolution.

The Financial Times observes that "at some point Tehran will be forced to cut already low production.

The build-up of crude stored offshore "could be an early indication that the new sanctions are reducing the appetite in Asia for Iranian crude, just as the price of the commodity weakens.

"If the trend of lower Iranian oil exports and lower prices remains for the remainder of the year, Tehran could suffer significantly more from the sanctions than in 2012," the Financial Times cautioned.

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