The Fall of Oil Prices and Its Impact on the Future of Rouhani's Government

A 25 to 30 percent drop in global oil prices has raised the question of what causes this event at a time when Syria and parts of Iraq are experiencing instability and unrest due to the expansion of the Islamic State's activities. On the other hand, discussions among Iranian economic experts have emerged regarding how a decrease in oil prices to around eighty dollars will affect Iran's economy, which relies directly and indirectly on the oil industry for nearly eighty percent of its annual national income. What options does President Hassan Rouhani's supportive government have to face the consequences of this significant drop in oil prices? This week's guests on the program include Fariborz Raees Dana, an economist in Tehran; Shahin Fatemi, head of the Business and Economics Department at the American University of Paris; and Hamid Zangeneh, an economics professor at Whittier College in Chester, Pennsylvania. Mr. Raees Dana, let's first address the causes of the 25 percent drop in oil prices compared to two years ago, particularly in the last five months amidst all this political turmoil and unrest, especially in the Middle East. Why has the price decreased instead of increasing? Historically, unrest and instability have led to an increase in oil prices, but now the opposite seems to be true. Fariborz Raees Dana: The factors that drive oil prices up and down do not carry equal weight. Structural issues in the advanced industrial capitalist economies, which account for about 60 to 65 percent of global GDP and approximately 75 to 80 percent of global industrial production, have a much greater impact than temporary factors like wars or unrest. Not that they don't have an impact; sometimes they do. However, if we look at the trends of the past thirty to forty years, structural factors in industrial economies have played a larger role. In the past two days, structural factors have caused prices to rise. The benchmark price of oil has risen above 86 dollars. A few news items from key areas that determine oil prices have contributed to this effect, such as an increase in consumer confidence in the U.S. due to lower gasoline prices, and an increase in durable goods orders. Additionally, there was unexpected news of a 2.7 percent increase in Japan's industrial production, which was previously forecasted to be just above 2 percent. All these factors have contributed to a slight increase in prices in the last two to three days. Looking at the overall trends, for example, China has purchased 18 million barrels of Middle Eastern oil in recent months for its strategic reserves, aiming to increase its reserves to 680 million barrels by 2020. These are factors that drive prices up. However, the downward factors include a decline in demand, lower fuel prices, and persistent crisis outlooks, which I believe have continued since the 2007-2008 crisis with minor changes. Recent statistics and reports regarding industrial growth in industrialized countries have been disappointing, which has had its effect. Disturbing factors, such as events in Iraq or Kobani's resistance, can also be either upward or downward factors. For instance, Kobani's relative victory over ISIS could stabilize the situation, as it is ISIS that creates instability. However, I consider these factors to be secondary. I view the situation within the context of the industrial economy. Mr. Fatemi, some believe there is a conspiracy behind the significant drop in oil prices, while others argue that the majority of the decrease is due to supply and demand dynamics. This perspective was also shared by Mr. Raees Dana, indicating that demand for oil in China and India, as well as in the U.S. and Europe, is lower than supply. Shahin Fatemi: Yes, it is certainly a matter of supply and demand. Not only has demand decreased due to the economic crisis that Europe is still grappling with, even Germany, which was supposed to be the locomotive of the European economy, is not doing well economically. It has been negative. On the other hand, supply has increased significantly. The fact is that the U.S. no longer needs as much oil from the world as it used to. The U.S. is currently producing between three to four million barrels of shale oil daily, and this number is increasing. I believe prices will not return to their previous levels anytime soon. I think next year, in 2015, prices, which are currently around 85 dollars for Brent, could drop to 75 or even 70, as some predict, before rising again. Another issue is that OPEC no longer holds the same importance as before. Currently, OPEC's ceiling is 25 million and 800 thousand barrels, but we see that what it can sell today is 1 million and 200 thousand barrels below that. Therefore, I believe the issue is economic, and the person who proposed this theory, Mr. Thomas Friedman from the New York Times, suggested that one reason for the collapse of the Soviet system was that Saudi Arabia lowered oil prices. While Mr. Friedman does not claim that this is happening now, he has proposed it as a hypothesis that the U.S. and Saudi Arabia may be intentionally lowering oil prices to pressure Russia and the Islamic Republic. However, he also states that this is merely a theory. The main issue remains the increase in supply coinciding with a decrease in demand due to the economic crisis in Europe, and neither Japan nor the U.S. has managed to grow beyond 3.5 percent. Additionally, we should remember that China, which has always experienced growth rates of 10 to 12 percent, is now around 7 percent, which has also created issues. These are, in my opinion, the realities that can explain the drop in oil prices. Mr. Zangeneh, Mr. Fatemi just mentioned OPEC and Saudi Arabia. In searching for the reasons behind the significant drop in oil prices, many point fingers at Saudi Arabia. Some say that Saudi Arabia is not pursuing a reduction in production and an increase in oil prices because a price drop politically harms Iran and Russia, which support Bashar al-Assad's regime. In other words, Riyadh is politically exploiting the drop in oil prices to pressure Tehran and Moscow, according to this view. However, others believe that Saudi Arabia's decision is not political but rather economic. That is, Riyadh learned from the lessons of the 1980s when oil prices dropped to ten dollars and does not want other producers like Britain and Norway to take advantage of Saudi Arabia's production cuts and fill the gaps in the global oil market. What is your opinion? Hamid Zangeneh: I think this issue was partially addressed by Dr. Raees Dana. I believe it is both political and economic. However, overall, economics takes precedence over politics. It is said that Saudi Arabia periodically lowers oil prices to bankrupt some speculators in the market. In other words, those who, for example, until this past summer, bought oil at very high prices and artificially raised prices through speculation, scaring people with stories about ISIS controlling Iraqi oil production, have now realized that, as my friends mentioned, Japan has started to reactivate its nuclear power plants. Japan, Germany, and France's economies have slowed down. Iran, Libya, Iraq, and the U.S. have increased their oil production. Therefore, there is a significant amount of oil in the market with no buyers. Hence, Saudi Arabia has taken advantage of this situation by not increasing its production and allowing oil prices to drop. Ultimately, Saudi Arabia will have the final say in the oil market, as it has in the past. I believe their intention is to eliminate marginal producers who cannot sustain production at prices below 70 or 65 dollars. They cannot eliminate the U.S. or fracking, but they can eliminate those who need high oil prices to remain profitable. Another important point is that they are also fighting against speculators. This is something they have always done, and research has shown that Saudi Arabia has consistently engaged in this game with speculators. They allow prices to rise artificially among themselves and then suddenly pull the rug out from under them, bringing prices down. I believe that around 80 dollars is the lower limit. However, Russia believes its lower limit is 60 dollars, meaning they have stated that they will not be concerned until prices reach 60 dollars, and they will not take any action. Therefore, while there is political maneuvering, the overall issue remains supply and demand and who controls it. Saudi Arabia has always had the final word, and I believe they will again. Let's discuss the potential impact of falling oil prices on Iran's economy. Mr. Raees Dana, how significant is this impact? The hopes related to resolving nuclear disputes are turning into despair. Although many of us did not have this hope in the past, if these disputes are resolved, the sanctions will not simply disappear, and the oil revenues that come in will not flow into the veins of our economy. They will not be injected. The wells have been dug, and even if resolving the nuclear dispute leads to increased oil revenues, this increase is not very high, and some of it will go to specific economic power groups. However, there are also political reasons and competition for power that have supported Rouhani's government, suggesting that it is paving the way for the salvation and happiness of the people. Now, a large number of news regarding oil prices and many of these hopes have turned into despair. This will affect investment decisions. Although investment decisions have not typically been job-creating investments with a high multiplier effect in Iran, they usually either go towards construction and trade or the money flees abroad. In any case, if this drop in oil prices continues for a while, which I have seen in the past two to three days, there has been a slight increase... and despite China's and India's strategic purchases... there has been an increase. This is due to the structure of the industrial economy, which has shown some improvements. However, this may not continue, and as my friends mentioned, there is no serious prospect for a significant rise in oil prices. Therefore, if this situation persists, all the hopes stemming from resolving the nuclear dispute will be neutralized. Consequently, unemployment, inflation, unequal income distribution, and the dominance of the economic power structure that does not tolerate necessary flexibility among the groups of people will continue. Mr. Fatemi, is the drop in oil prices below 80 dollars manageable for the Iranian government, or as Mr. Raees Dana suggests, could the effects of reduced sanctions and inflation control be neutralized in the Iranian economy? There are two issues here. One is the psychological impact of falling oil prices, which weakens Iran's position in negotiations and is likely coincidental. There is no power in the world that can adjust oil prices through nuclear negotiations. However, I do not believe that there will be much pressure on Rouhani's government from an economic negotiation standpoint. The 93 budget was set based on 100 dollars. Currently, the price is around 85 dollars, but due to high revenues in the early months of the year, there has not yet been significant pressure on the government. If Iran can negotiate well in the upcoming negotiations and gain a bit more permission to export, it will manage to stay afloat. However, if negotiations end in failure, I also do not believe that oil prices will rise anytime soon, and changes will trend downwards. In that case, the government will face challenges in the first six months of the coming year. However, as I mentioned, since the budget was set at 100 dollars and prices were higher in the early months, there has not yet been significant pressure on the government. Nevertheless, Rouhani's government officials have already stated that they need to cut expenditures, which will be quite challenging for them, and they will likely turn to capital budgets since they cannot reduce other expenditures. Mr. Zangeneh, it is currently stated that according to official statistics, seven million people in Iran are suffering from severe poverty. Mr. Raees Dana made some references. According to Ali Rabiei, the Minister of Labor and Social Welfare, this figure has been mentioned. The impact of falling oil prices on vulnerable and impoverished classes and social strata...