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> the cost of extracting oil is so high in Iran I think you might be reading that wrong. It isn’t that the cost of extracting the oil is so high, but that the

> the cost of extracting oil is so high in Iran I think you might be reading that wrong. It isn’t that the cost of extracting the oil is so high, but that the budgets of these countries depends on the price of oil being high. When the price drops, they can no longer cover their entire budget and will need to borrow or reduce their spending. These numbers aren’t related to the cost of extraction (which is a different issue but is also variable between different regions).

xiaolingxiao 7y ago
Ah, so does this mean Iran is particularly dependent on oil to finance itself?
- rckoepke 7y ago
  Indeed: https://commons.wikimedia.org/wiki/File:Islamic_Republic_of_Iran_Exports_Treemap_2017.svg https://commons.wikimedia.org/wiki/File:Islamic_Republic_of_... (edited to 2017) 79% of their exports is unrefined crude oil. While exports are not always the whole story, in this case it is extremely relevant. If Iran's economy was 99% domestic and 1% trade, (essentially autarkic) then it wouldn't really matter at all what the price of oil is, as Iran makes everything it needs for itself, whether that be automobiles, medical equipment, financial services, concrete, etc. However, Iran is not autarkic and trade is about 50% of its GDP. In order to complete international trade it requires foreign currency. At the start of the year, Iran had $85B in foreign reserves, according to FRED anyways. It was expected to lose $15B this year, but that was supposed to be while exporting $30B of crude oil. If that $30B is now only $10B, then Iran could lose $35B of foreign reserves this year. They can reduce domestic spending (potentially lowering quality of life for citizens), or they can spin up domestic industry to replace imports, or they can figure out how to increase the $$ value of their exports (potentially by refining the crude oil into higher value products, for example). If they don't do anything, and the trend continues in a straight line, they'd run out of foreign reserves within 3 years. At that point, it would be very difficult for them to buy any of the imports they need and they'd face a venezuela-style situation where citizens would find it impossible to get whatever goods used to be imported. For Iran, this is food, cars, durable goods & machinery, electronics, and textiles: https://atlas.cid.harvard.edu/explore?country=107&product=undefined&year=2017&tradeDirection=import&productClass=HS&target=Product&partner=undefined&startYear=undefined https://atlas.cid.harvard.edu/explore?country=107&product=un...
  - redis_mlc 7y ago
    All oil and gas exporters become dependant on that revenue. It's human nature to spend it all.
    - opo 7y ago
      People can choose to do that, or they can choose to save and invest the money. Norway's oil fund is around 1 trillion dollars. >...The Government Pension Fund Global, also known as the Oil Fund, was established in 1990 to invest the surplus revenues of the Norwegian petroleum sector. It has over US$1 trillion in assets, including 1.4% of global stocks and shares, making it the world’s largest sovereign wealth fund. https://en.wikipedia.org/wiki/Government_Pension_Fund_of_Norway https://en.wikipedia.org/wiki/Government_Pension_Fund_of_Nor...
      - sadfklsjlkjwt 7y ago
        An increasing proportion of Norwegian spending is already covered by the revenues from the Oil Fund. This crisis has seen a near perfect storm of massive increase in welfare spending, massive fall in the value or the Oil Fund's assets and massive decrease in the price of oil (and hence the input for the Oil Fund). It will be very interesting to see what happens with the fund in the next 10-20 years. EDIT: To be clear I am glad the fund exists. It has been and is a much better way of using the natural resource bonus. However, I strongly suspect that Norway will use the entire fund cushioning the transition away from being an oil producer.
        jacobush 7y ago
        Not a bad use.
        teknopaul 7y ago
        Countries under sanctions, obviously, cannot choose what to spend their money on. If you impose sanctions you are essentially government planning another country. I agree with the article's principal point that this is very likey to go horribly wrong somewhere soon. Prevention is better than cure. Even from a purely selfish viewpoint.
sandworm101 7y ago
>> When the price drops, they can no longer cover their entire budget and will need to borrow or reduce their spending. And there is another angle to these numbers. They are the prices based on recent exports of oil. Iran isn't a silly country that requires $300 oil to break even. Their oil exports have dropped in recent years. That drop (sanctions) is a separate factor than oil price. If oil exports a halved, the break-even price doubles. But if oil prices climbed Iran would probably find a way to export more oil, decreasing its break even price to something more reasonable.

xiaolingxiao 7y ago

Ah, so does this mean Iran is particularly dependent on oil to finance itself?

rckoepke 7y ago
Indeed: https://commons.wikimedia.org/wiki/File:Islamic_Republic_of_Iran_Exports_Treemap_2017.svg https://commons.wikimedia.org/wiki/File:Islamic_Republic_of_... (edited to 2017) 79% of their exports is unrefined crude oil. While exports are not always the whole story, in this case it is extremely relevant. If Iran's economy was 99% domestic and 1% trade, (essentially autarkic) then it wouldn't really matter at all what the price of oil is, as Iran makes everything it needs for itself, whether that be automobiles, medical equipment, financial services, concrete, etc. However, Iran is not autarkic and trade is about 50% of its GDP. In order to complete international trade it requires foreign currency. At the start of the year, Iran had $85B in foreign reserves, according to FRED anyways. It was expected to lose $15B this year, but that was supposed to be while exporting $30B of crude oil. If that $30B is now only $10B, then Iran could lose $35B of foreign reserves this year. They can reduce domestic spending (potentially lowering quality of life for citizens), or they can spin up domestic industry to replace imports, or they can figure out how to increase the $$ value of their exports (potentially by refining the crude oil into higher value products, for example). If they don't do anything, and the trend continues in a straight line, they'd run out of foreign reserves within 3 years. At that point, it would be very difficult for them to buy any of the imports they need and they'd face a venezuela-style situation where citizens would find it impossible to get whatever goods used to be imported. For Iran, this is food, cars, durable goods & machinery, electronics, and textiles: https://atlas.cid.harvard.edu/explore?country=107&product=undefined&year=2017&tradeDirection=import&productClass=HS&target=Product&partner=undefined&startYear=undefined https://atlas.cid.harvard.edu/explore?country=107&product=un...
- redis_mlc 7y ago
  All oil and gas exporters become dependant on that revenue. It's human nature to spend it all.
  - opo 7y ago
    People can choose to do that, or they can choose to save and invest the money. Norway's oil fund is around 1 trillion dollars. >...The Government Pension Fund Global, also known as the Oil Fund, was established in 1990 to invest the surplus revenues of the Norwegian petroleum sector. It has over US$1 trillion in assets, including 1.4% of global stocks and shares, making it the world’s largest sovereign wealth fund. https://en.wikipedia.org/wiki/Government_Pension_Fund_of_Norway https://en.wikipedia.org/wiki/Government_Pension_Fund_of_Nor...
    - sadfklsjlkjwt 7y ago
      An increasing proportion of Norwegian spending is already covered by the revenues from the Oil Fund. This crisis has seen a near perfect storm of massive increase in welfare spending, massive fall in the value or the Oil Fund's assets and massive decrease in the price of oil (and hence the input for the Oil Fund). It will be very interesting to see what happens with the fund in the next 10-20 years. EDIT: To be clear I am glad the fund exists. It has been and is a much better way of using the natural resource bonus. However, I strongly suspect that Norway will use the entire fund cushioning the transition away from being an oil producer.
      - jacobush 7y ago
        Not a bad use.
        teknopaul 7y ago
        Countries under sanctions, obviously, cannot choose what to spend their money on. If you impose sanctions you are essentially government planning another country. I agree with the article's principal point that this is very likey to go horribly wrong somewhere soon. Prevention is better than cure. Even from a purely selfish viewpoint.

sandworm101 7y ago

>> When the price drops, they can no longer cover their entire budget and will need to borrow or reduce their spending. And there is another angle to these numbers. They are the prices based on recent exports of oil. Iran isn't a silly country that requires $300 oil to break even. Their oil exports have dropped in recent years. That drop (sanctions) is a separate factor than oil price. If oil exports a halved, the break-even price doubles. But if oil prices climbed Iran would probably find a way to export more oil, decreasing its break even price to something more reasonable.