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Iran’s Dire Oil Straits

Prepared by: Lionel Beehner
February 19, 2007


Among the parties with a keen interest in the nuclear standoff between Iran and the UN Security Council are foreign investors. Iran is an energy bonanza (NYT) in their eyes: Its underdeveloped oil and gas fields, the world’s second largest, need outside expertise, capital, and technology. A number of development projects are under way, but investors remain skittish over Iran’s uncertain political prospects. Royal Dutch/Shell, for example, has its sights on Iran’s South Pars natural gas field but has held off from sealing a projected $10 billion deal (RFE/RL) for fear of compromising its stake in U.S. markets. As this Backgrounder explains, the U.S. Treasury has put a financial squeeze on foreign companies like Shell that invest in Iranian energy projects. A fresh round of UN sanctions could also be forthcoming in response to Iran’s ongoing rejection of calls for freezing its uranium enrichment program.

Iranian leaders, of course, also have good reason to be jittery, as this new Backgrounder outlines. Iran’s economy relies heavily on oil revenues but energy exports are down. Production is not keeping pace with demand, requiring Iran to import 170,000 barrels of gas per day—a third of its energy needs. Domestic demand, spurred on by subsidized prices at the pump and a swelling population, has skyrocketed. Iran’s energy prospects look so grim that the government rolled out an unpopular new rationing plan (Weekly Standard) for consumers to curb their gasoline intake. That may be a tough pill to swallow for Iranians already struggling with double-digit inflation and unemployment.   

To be sure, energy analysts have no illusions about the nature of Iran’s economy. Oil exports, which account for half the government’s revenue, may dwindle to zero by 2015 without a flood of foreign investment, predicts Roger Stern of Johns Hopkins University. Iran's battered economy could be further damaged in the event of a continuing downward trend in global oil prices. Finally, there is what oil traders call the “risk premium,” writes James Surowiecki of the New Yorker; that is, President Mahmoud Ahmadinejad has “an economic incentive to say confrontational things that spook the oil market” and thus drive up oil prices in the short run.   

Iran’s energy woes also have important implications for the current nuclear standoff. Tehran claims its nuclear program is aimed at electricity generation that will free up its oil and gas resources for exports. “Iran may well need nuclear energy for peaceful purposes,” writes Arnon Gutfeld of Tel Aviv University in the Canada Free Press. Most outsiders, however, suspect Iran intends to build an atomic bomb.

At the same time, some experts suspect Tehran’s options for deterring attacks on that program are shrinking. For example, Gutfeld says Tehran’s willingness to strike back with the “oil weapon” option—such as blocking the Strait of Hormuz or suspending oil exports—in the face of a military strike against its nuclear installations is unlikely given Iran’s dire economic condition. The question, asks journalist Peter C. Glover in this World Politics Watch report, becomes: “Which will kick in first: Economic relief from a new era of energy megadeals, or a waning of [Iran’s] regional influence born of increasing domestic economic failure?”

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