The steep decline of the Iranian rial against the dollar has produced a lot of extravagant claims about the collapse of the Iranian economy. While there is no doubt that Iran is seeing a form of hyper-inflation that is devastating to the people there, the government is in no danger of not having money.
Because of slowed demand attendant on the bad world economy and because some producers (including Saudi Arabia, Iraq and North Dakota) have managed to produce some extra petroleum, the US/European Union/ Israeli financial blockade on Iranian petroleum has had some success for the first time in 2012.
However, things are not as bad as all that for the Iranian government, as opposed to the people. As Djavad Salehi-Esfahani explains, Iran is cushioned from the worst effects of a declining rial by the government’s ability to use its oil income to subsidize essential imports. The situation is therefore not comparable to other instances of hyperinflation where all imports had to be imported by consumers at the new, higher prices (vis-a-vis the local currency).
The Iranian government is coming off several years of magnificent oil profits. In 2004, the government earned $37 billion from its petroleum, and no one thought it was in crisis then. It could arguably go back to that level and get along just fine. But in 2005-2006 the income rose to an average of $46 billion a year. Then the oil price boom began. In 2007 and 2008, they brought in a little over $80 bn a year, each year! That is almost a doubling of their normal income earlier in the decade. In 2009-2010 the price fell a bit and Iran brought in about $70 bn. a year those two years. But 2011 saw another big run-up in oil prices, and Iran received an astounding $95 bn. last year.
The Europeans started refusing to buy Iranian petroleum as of July 1, and world supply and demand is such that in the short term, Iran may just export less oil this year. But 60% of its market is in Asia, and they are buying. The US estimates that Iran will have an oil income of $70 billion in 2012. That is par for the course in recent non-boom years, and even if it were less, it would still be above 2006 levels. 2006 levels probably wouldn’t be a hardship for the government (just as they weren’t in 2006).
So far from collapsing, the Iranian state oil income has been incredibly high in recent years and continues to be high compared to a decade ago. See this chart:
Moreover, the likelihood that Iran can be driven into penury over the next couple of years by a Western oil boycott strikes me as low. The US Department of Energy expects world production to rise from 89 million barrels a day in 2012 to 90 million barrels a day in 2013. But if Asian demand returns (and if more Indians and Chinese buy cars, as they have in fact been doing), then world demand could easily exceed production. Even now, demand is historically high, producing Brent crude prices that have been over $100 a barrel for a long time. A year or two from now, the world may soon end up wanting the half a million or million barrels a day it is now telling Iran to keep in the ground. Saudi production cannot be increased, and it is unclear that near-term Iraqi increases are likely on any kind of scale. Many oil producers face constant threats of disruption from labor actions and other causes. Betting on no interruptions of production anywhere, significant production increases and continued low demand– all them necessary if the oil blockade on Iran is to be effective in the medium term — would in my view be foolish.
Some of Iran’s reduced exports come from having to find new ways of shipping the oil (it had been exporting roughly 2.5 million barrels a day out of a 3.8 million barrel a day production, and the government claims, at least, to be exporting 2 mn. b/d in September, way up from the July dip when Europe cut Iran off).
Iran is now sending petroleum to China and South Korea in Iranian-owned tankers and covering the insurance on the shipments itself. But Iran had a limited tanker fleet and so the shipments are sometimes late. Iran is solving this problem by simply buying 12 supertankers from China (the first has just arrived). Supertankers are $50-$100 million and so well within Iran’s ability to purchase and run. South Korea has just started back up its oil imports from Iran, of 200,000 barrels a day, after the insurance problem was solved. The US wants South Korea and others to cut back on Iran imports; but since Europe is snarfing up petroleum from other sources now that it is boycotting Iran, South Korea and others may find it difficult to fulfill their needs without buying from Iran.
Because the US Department of the Treasury has kicked Iran off most international bank exchanges, Iran may have to accept payments in Chinese currency or even in a relatively soft currency like the India rupee (which, however, is hardening). That arrangement would lock Iran into buying Chinese and Indian goods where at all possible, in preference to European ones (or finding exporters willing to take rinminbi). So Europe’s step in ceasing imports of Iranian oil may cost the EU member nations dearly in lost exports to Iran (nor can a lot of European countries afford to lose the Iranian market).
The long and the short of it is that the Iranian state’s external revenues are still perfectly healthy, despite the rial currency crisis and all the damage it is doing to the Iranian middle and business classes. Because of the state’s currency reserves, moreover, it can mitigate the impact of the currency crisis on key imports.
It is a sad, desperate scene for consumers, but the ayatollahs are still rolling in dough.
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