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Tehran’s $50 billion problem

29 Mar 2012 By Una Galani

Iran’s oil revenue could halve. Top buyers are moving to cut imports of crude from the Islamic Republic amid a coordinated effort by the West to tighten sanctions. If Tehran has to sell the oil it does manage to shift at a discount, it may soon face the pinch.

The republic generated $100 billion in oil revenue last year, assuming exports of 2.5 million barrels per day and an average Brent price of $111 per barrel. That is roughly 20 percent of GDP and 80 percent of general government revenue, based on estimates by the International Monetary Fund for 2011.

Sanctions could cut Iran’s oil exports by as much as 1 million barrels per day, or 40 percent, from the middle of the year, according to the International Energy Agency. That’s when both the European Union embargo and U.S. sanctions on third countries which don’t significantly cut their imports from Iran come into force. America’s threat to cut off central banks of countries that don’t play ball is already causing Asian countries to reduce their purchases: a fall of between 10 and 20 percent in exports to these nations seems reasonable.

Assuming Iran’s exports fall by 1 million barrels per day and it can sell at current prices of $125 per barrel, the government’s oil revenues will still shrink by one third in the subsequent full one year period to July. The actual outcome could be much worse. It’s not clear whether Iran has started discounting its crude but many analysts believe that will be necessary as financial sanctions complicate payment.

A Reuters poll forecasts the average price of Brent in 2012 at $115 per barrel. If Iran has to offer a 20 percent discount on top of that price and was still only able to sell 1.5 million barrels a day, then revenues would halve, shrinking by $50 billion.

Even without a discount, a similar outcome could materialise if global oil prices fall or the United States keeps up pressure beyond July for buyers to continue cutting imports. In the murky world of shipping, Iran might find loopholes. But if sanctions scare away buyers, that will deal a severe blow to Tehran’s finances.

Breakingviews calculator: How much will sanctions hurt Iran?


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