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Int'l sanctions and increase in Saudi Arabia's oil production to reduce Iran's oil revenues

Oil&Gas Materials 1 July 2011 11:29
The combination of sanctions applied against Iran and the likely will impact on reducing Iran's oil revenues, even below the expectation of the government, said U.S. Northeastern University Professor Kamran Dadkhah.
Int'l sanctions and increase in Saudi Arabia's oil production to reduce Iran's oil revenues

Azerbaijan, Baku, July 1 /Trend T.Konyayeva/

The combination of sanctions applied against Iran and the likely will impact on reducing Iran's oil revenues, even below the expectation of the government, said U.S. Northeastern University Professor Kamran Dadkhah.

"International sanctions have deprived Iran from access to international capital and technology," Dadkhah wrote Trend in an e-mail. "In the recent OPEC meeting, members did not agree to raise production but it is likely that Saudi Arabia will increase production, thus stabilizing the oil market and lowering the price. The combination of these factors would reduce Iran's oil revenue below the expectation of government."

Oil production in Iran is decreasing by 100,000 barrels a day, the head of Iranian Parliament's Energy Committee Hamidrza Katuzian said this week. Despite Iran's parliament has approved a budget based on an oil price of $81.5 a barrel, currently oil price keeps dropping.

According to Dadkhah, the main reason of decline in Iran's petroleum production is lack of investment to develop new fields and to maintain the production capabilities of the existing fields.

"Iran needs the resources and technology of Western oil companies," he added. "One reason for Ahmadinejad's policy of removing subsidies is to reduce the domestic demand for petroleum products. Such a policy, on the one hand, will reduce Iran's need for gasoline import and, on the other, frees some crude to be exported."

Iran's refusal to abandon its nuclear activities has resulted in resolutions adopted by the UN Security Council in 2010, as well as additional unilateral sanctions approved by the U.S. Congress and the foreign ministers of all EU countries, which were primarily directed against the banking, financial and energy sectors of Iran.

Restrictions imposed by the EU include the ban on the sale of equipment, technologies and services to Iran's energy sector which is a major source of revenue for the Iranian regime; the same measure refers to the refining industry. New investments in Iran's energy sector were also prohibited as a whole. Because of lack of investments due to the sanctions, the production capacity is decreasing, and therefore, Iran cannot effectively increase production.

The targeted subsidy plan launched in December 2010 aims to gradually remove all subsidies over a five-year period and instead give families cash handouts as compensation.

It eliminates subsidies on gasoline, natural gas, electricity, food, and is considered to be one of the most important economic undertakings in Iran's modern history.

Dadkhah believes that the exact effect on the budget is difficult to estimate as the government has not published a complete and comprehensive budget.

"Nevertheless, the revenues will fall short of government forecast," he believes. "Oil revenues are the main source of Iranian government income. Indeed, the Iranian economy is badly dependent on petroleum exports, and a decline in the value of oil exports has far reaching consequences."

The American expert mentioned that the government has two options in order to meet its budgeted expenditures in the event of a decline in oil revenues: to borrow from Bank Markazi (the central bank) and to curtail expenditures.

"To borrow from Bank Markazi (the Central Bank), that is, to print money," Dadkhah underscored. "This would further increase the rate of inflation that will bring severe hardship for people. Furthermore, there will be higher demand for the dollar. If the government tries to keep the exchange rate for the dollar low (a wrongheaded policy pursued by the current government), it will lose its reserves."

According to Dadkhah, Iran's oil revenues are obtained through the sale of national wealth. "Therefore, it should be used for investment purposes not for meeting day-to-day government expenses," Dadkhah told.

Early June, the Central Bank of Iran reported that inflation rate in April was 13.2 percent. However, the Statistical Center of Iran reported this figure at 15.3 percent.

The inflation rate from April 20 to May 20 was reported at 16.7 by Statistical Center of Iran (SCI). Meanwhile, the Central Bank of Iran already announced the inflation rate at 14.2 percent for the same period.

While point-to-point inflation at the same period was announced at 21.2 percent by the Central Bank of Iran, this figure is indicated at 26 percent in the report of the Statistical Center of Iran.

Some economists think that high inflation in Iran is due to President Mahmoud Ahmadinejad's wrong economic policy. He lends small and medium businesses enormous finances at low interest rates, subsidizes the people, and greatly invests public funds in the industrial sector.

According to experts, oil export revenues are also distributed improperly.

As to curtailing expenditures, Dadkhah believes this would be hard to do. "Such reduction in expenditures would directly affect income and employment in the country. Recall that it is estimated that government controls 70-80 per cent of the Iranian economy," he said.

The government has to start with two bold policies if it wants to extricate the economy from the present quagmire, the expert thinks.

"First, it has to come to terms with the West and indeed the international community so that the sanctions are removed. Second, it has to embark on real (as opposed to nominal) privatization of the economy," Dadkhah concluded.

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