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With Oil Down, Will Iran Follow?

Author: Greg Bruno
October 28, 2008

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The recent tumble in global economic growth has fed an equally precipitous fall in energy prices, a trend welcomed by consumers across the world but deeply worrying to many energy exporting nations. Analysts predict most members of the Organization of the Petroleum Exporting Countries, particularly those with large hard currency reserves, will weather the price plunge. As the Economist reports, Iran is at the top of the list of those that may not.

Three rounds of UN sanctions and years of U.S.-backed economic isolation have left Tehran dependent on oil exports for eighty percent of the government's revenue. As oil prices drop further, analysts see an opening for governments eager to temper Iranian power in the Middle East.  How much leverage the decline in oil prices will give the West over Iran is debatable. Mitchell B. Reiss, an expert on nuclear nonproliferation, writes in a new CFR.org forum that plummeting oil prices "will strain an already stressed Iranian economy, giving us more leverage" in forcing changes to the mullah's nuclear posture. Yet Reiss says the global financial crisis could make European partners reluctant to support sanctions against Iran out of a desire to protect jobs and market share. Bruno Tertrais, a senior research fellow at the Foundation for Strategic Research in Paris, meanwhile, argues in the same CFR.org forum that "Europe will not be in a bad position to bargain" if oil prices drag the Iranian economy further, suggesting European support for sanctions could continue.

Beyond the nuclear question, the oil slump could also affect Iran's regional influence, some analysts predict. As the Wall Street Journal reports, while Iran's "petrodollar piggy bank" remains flush, a sustained dip in petroleum prices "may temper Iran's recent ascendancy." Analysts say Iran has used its oil wealth to help fund Hezbollah in Lebanon, bolster ties with the Iraqi government, and support Hamas in the Gaza Strip. "The drop in oil prices will make the Iranian regime re-examine its calculations (NYT) because its political immunity is less," says Mustafa El-Labbad, director of the East Center for Regional and Strategic Studies in Cairo.

A string of budgetary assessments buoys such predictions. A recent survey of global crude prices by Deutsche Bank Global Markets Research found Iran needs oil to stay at or above $95 a barrel to balance its books, significantly more than Russia ($70) or Saudi Arabia ($55). According to the International Monetary Fund, most oil-exporting countries can weather declines to $57 a barrel (PDF); Iran is one of the few exceptions (Iraq is the other). Farideh Farhi, an expert on Iranian politics at the University of Hawaii, notes that Iran's economic troubles under President Mahmoud Ahmadinejad--surging inflation and unemployment, for instance--were already factoring into the 2009 presidential race. Now with declining oil prices and larger than expected budget deficits, "talks of Ahmadinejad's wrong-headed policies as well as incompetence are bound to intensify." Raghida Dergham, senior diplomatic correspondent for London-based Al-Hayat, writes that the oil price hike will lead to much soul-searching inside Iran on the nuclear program as well as its regional ambitions.

Yet many Iran analysts say it will take more than low oil prices for Tehran to alter policies deemed counter to Western interests. Indeed, some experts are already calling for tough action from the next U.S. president. A new report from the Bipartisan Policy Center on American policy (PDF) toward Iran's nuclear program says the incoming administration should consider a blockade on Iranian gasoline imports or, if needed, a block of its oil exports to "spark further social discontent and political upheaval." Other Iran experts say what is needed are sweeter carrots and bigger sticks; one possible solution would be to allow Iran to pursue limited enrichment of uranium under enhanced international monitoring. But as experts blogging at CFR.org warn, even this strategy has limitations.

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