December 26, 2006

Iran and Declining Oil Revenues

Despite some misconceptions in today's news reports, Iran is not running out of oil - they have between 131 and 138 billion barrels of proved oil reserves, depending on what source you use. However, their revenues from oil exports are in decline, by as much as 10 percent per year.

There are several reasons for this decline, mostly of the government's own making. Over the last few years, they have been pouring immense amounts of money into weapons programs, both conventional and nuclear. These programs include longer range ballistic missiles, cruise missiles, high-speed torpedoes, naval combatants, etc., in addition to the now famous nuclear weapons program. All these research and development programs are expensive. Money needed for improvements in the oil sector are being diverted to these programs. Iran responds that U.S. sanctions that punish companies that deal with Iran hurt their ability to spend money on the oil sector.

Other factors impacting Iran's oils exports are domestic demand and lack of refining capability. Domestic demand is skyrocketing, cutting into the amount of oil that can be exported. Iran does not refine enough gasoline and diesel to satisfy domestic requirements - about 40 percent of it must be imported.

Sanctions imposed by the United Nations Security Council Resolution 1737 may not be strong, but if Iran does not comply by suspending uranium enrichment, more stringent sanctions are likely to follow. This will only exacerbate the declining oil revenue situation.

Many analysts believe that the declining revenues, sanctions, internal political unrest and rampant poverty in a country with the second largest oil reserves in the world will bring about internal regime change if left alone. The problem is the time line. It may take five years for these issues to come to a head. Iran may have a deliverable nuclear weapon in less that three years. Is the world willing to wait?