Oil Prices Fall Again: A New Challenge for Hassan Rouhani

With a sixteen percent decrease over the past thirty days, the price of North Sea Brent oil has experienced its most significant monthly drop in the last two years. If we consider the period from January 1 to June 23 of this year, the decline in oil prices amounts to nineteen percent, equivalent to eleven dollars. In fact, during this period, the price of Brent oil has decreased from about 57 dollars to nearly 46 dollars, raising increasing concerns among several oil-exporting countries, including Iran. The ineffectiveness of OPEC was evident at the end of November last year when member countries, along with several non-member countries including Russia, jointly decided to reduce their production by 1.8 million barrels per day for six months to curb supply and raise oil prices. In May of this year, the same agreement was extended for another nine months (until March 2018) to, according to OPEC experts, end the oil surplus in the market and create a suitable environment for a long-term increase in the price of this commodity. The main architect of this agreement was Saudi Arabia, which was confident that by gaining Russia's agreement and controlling oil supply, it would regain control of the global market for this commodity. The hopes of OPEC and Saudi Arabia fell flat, and instead of rising, oil prices fell again. It has once again been proven that oil increasingly resembles other raw materials, and its price fluctuations follow supply and demand laws more than OPEC manipulations. What seems surprising in this context is the lack of responsiveness of oil prices to geopolitical tensions. We see that in the Middle East, the heart of the world's oil industry, the flames of crisis are raging without oil prices being affected by this tense situation. Even the emergence of a new center of tension in the Persian Gulf following the economic blockade of Qatar by its Arab neighbors did not cause oil prices to rise. It is evident that global markets no longer take OPEC seriously as they once did and do not believe that this organization can influence oil price fluctuations. The reduction of 1.8 million barrels in oil production, implemented by OPEC and its allies, is neutralized for various reasons and does not effectively change the surplus supply. In Libya, oil production has reached its highest level in four years, and Nigeria has also increased its oil production. Moreover, despite the beginning of the holiday season in the U.S., which typically raises gasoline consumption, the stock of petroleum products in the country remains high. However, the most significant factor neutralizing OPEC's decisions to curb production to raise prices is U.S. shale oil. In fact, as soon as oil prices reach the range of fifty-five to sixty dollars, production in shale oil fields surges again due to profitability. Not long ago, the price of each barrel of oil had to exceed eighty dollars for shale oil production to be economically viable. Today, due to technical advancements, this threshold has lowered and is expected to decrease further. Given this development, the U.S. has more maneuvering power in influencing the global oil market than Saudi Arabia. For several oil-producing countries, the continued fall in oil prices is severely problematic. Venezuela's economy is collapsing, and if the country's foreign revenues drop further, the risk of uncontrollable chaos and a catastrophic famine for its people will increase. Algeria is another oil-producing country that suffers from significant fragility against falling oil prices. Iran, too, if the oil price decline continues, will face even greater economic difficulties along with increased political tensions. Hassan Rouhani's government is under fire from factions known as the 'principlists' of the Republic, and if it faces a currency shortage, it will have less power to resist them. The economic growth of the year 1395 (which was reported by the Central Bank of the Islamic Republic as 12.5 percent) was mainly due to increased oil exports following the implementation of the JCPOA and a relative increase in the price of this commodity in the global market. If the price of oil falls below forty-five dollars per barrel and continues, it could likely return the country's growth rate to the range of zero to two percent. Another consequence of the continued fall in oil prices would be an increase in the budget deficit for the year 1396, which was set based on oil prices above fifty dollars per barrel. In this situation, Hassan Rouhani's government, which politically cannot reduce consumer spending, will be forced to sacrifice the development budget, as has been the case in recent years and even more so. In 1394, only 29 percent of the budget allocated for development projects was actually disbursed. In 1395, a large portion of the development budget was sacrificed, to the extent that during the first nine months of the year, according to the Central Bank's assessment, the level of investment decreased by thirty percent compared to the previous year. The further decline in government investment through development projects will naturally exacerbate tensions in Iran's labor market, especially since the private sector cannot compensate for this decline, and foreign investments show little enthusiasm for entering Iran's labor market due to existing domestic political issues and difficulties in the international environment. Iran's inflation rate and the country's currency market will also be significantly affected by future fluctuations in oil prices. Given the political landscape in Iran, factions that are committed to further weakening Hassan Rouhani's government will likely not be disturbed by a further drop in oil prices, which would limit the president's maneuverability.