5 reasons Iran will be able to wait out low oil prices

March 18th, 2016

Awake Goy

Iranian officials have repeatedly rebuffed calls by other oil producers to halt or cut production. Tehran appears determined to reclaim market share lost as a result of EU and US sanctions imposed in recent years over its nuclear program.
Oil Minister Bijan Zangeneh has ridiculed the idea of a production freeze, calling it a “joke.” In his telling, Iran will only join talks to this end after it has reached its pre-sanctions output of 4 million barrels per day (bpd). In fact, since the Jan. 16 implementation day of the Joint Comprehensive Plan of Action (JCPOA), Tehran has followed through and increased production. Though slower than predicted, some 300,000 bpd have been added to Iran’s output, which now amounts to 3.2 million bpd. This has enhanced the oversupply in the international markets, thereby contributing to the prolonging of the low oil price cycle. Indeed, the dramatic oil price decline since mid-2014 has obviously hurt Iran, which is a major oil producer. Income from oil exports has crumbled accordingly, putting the Iranian government under severe pressure.

However, compared with other major oil producers, Iran finds itself in a somewhat better position to cope with low oil prices — at least in the long run. Time is particularly on Iran’s side when compared to its major regional rival, Saudi Arabia. In this vein, a number of factors play into Iran’s hand — if managed properly by the government.

First, Iran experienced the major fiscal shock to its budget earlier than other oil producers. Already since 2011, Tehran was confronted with a drastic decline in oil revenue. Harsh energy and financial sanctions by the European Union and the United States halved Iranian exports to 1.3 million bpd in 2013. In the meantime, Iran launched a series of mitigation policies under the label of the “Resistance Economy.” These comprise the increase of taxation as well as the promotion of non-oil economic growth.