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Why Iran Desperately Needs Higher Oil Prices

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Iran never enjoyed the oil windfalls of Saudi Arabia, at least partly because it forwent oil profits in lieu of growing a nuclear arsenal. This move resulted in economic sanctions from the U.S., Europe, and other global powers. Now, with international economic sanctions against Iran relaxed, Iran is trying to rebuild its wealth by supplying an additional 750,000 to 1 million barrels per day of oil to an already glutted market. According to the Institute of International Finance, Iran’s 2015 GDP is estimated at $368 billion, second only to Saudi Arabia’s 2015 GDP estimate of $631 billion. Yet, on a GDP per capita basis, Iran pales in comparison to Saudi Arabia, with a GDP per capita of $5,000 versus Saudi Arabia’s $21,000.

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Market Realist – Iran desperately needs higher oil prices

The United Nations imposed sanctions on Iran in 2006, after the country refused to suspend its nuclear program. Prior to that decision, the United States (IVV) (AGG) intensified its sanctions against Iran in 1995. The European Union (EZU) (EWG) also imposed some of the toughest sanctions against Iran.

Over the years, Iran’s economy has suffered badly from the after-effects of the sanctions. Plus, decades of mismanagement, the cost of funding conflicts in the region, have also taken a serious toll on the country’s public finances. Despite having ample oil, Iran couldn’t benefit from higher oil (GSG) prices since sanctions restricted its ability to export its oil.

In the face of increased economic pressure due to sanctions and a substantial decline in oil exports, Iran sought a nuclear deal with major world powers, which led to the sanctions lifting. Unfortunately, as the sanctions lifted, the oil market plummeted further, straining Iran’s already embattled economy. Iran has no other choice but to increase its oil supply to the international market, which has already been facing a serious glut.

Although Iran depends less on oil than some other major nations in the region, it still accounts for around 42% of government revenues. It desperately needs higher oil prices to shore up its financial resources. Otherwise, the entire financial system is at risk of a breakdown. So the country is likely to increase its oil production further in order to generate higher revenues.

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