Economy, Domestic Economy

Oil’s Role in Budget Shrinks

Oil’s Role in Budget ShrinksOil’s Role in Budget Shrinks

Oil's share of the Iranian budget is dwindling, although crude prices dip further and the government struggles to avoid a cutback in fiscal spending.

The government is looking to earn income via taxes and other non-oil sources.

Crude prices rose on Thursday, but fell as much as 35% for the year after a race to pump by Middle East crude producers and US shale oil drillers created an unprecedented global glut that may take through 2016 to clear, Reuters reported.

Global oil benchmark Brent and US crude's West Texas Intermediate futures rose by 1-2% on the day on short-covering and buying support in a thinly traded market ahead of the New Year holiday.

But for 2015, both benchmarks fell double-digits for a second straight year, as Saudi Arabia and other members of the once-powerful Organization of Petroleum Exporting Countries again failed to boost oil prices.

Crude prices plunged by two-thirds since mid-2014, curtailing the Iranian government's efforts to stabilize the economy. Oil revenues have fallen from over $100 billion three years ago to below $20 billion this year.

More recently, a slowing demand outlook, especially in Asia but also Europe, has started to further drag down the prices.

The immediate outlook for oil prices remains bleak. Goldman Sachs has said prices as low as $20 per barrel might be necessary to push enough production out of business and allow a rebalancing of the market.

The fall has been a real headache for President Hassan Rouhani's administration, which has worked through sanctions and crisis to address years of mismanagement. The changes needed for recovery and normalcy are costly, and Iran can ill-afford them with crude's direction.

Iran relies heavily on oil for its foreign exchange income. Further declines in oil prices could hamper government efforts to stabilize foreign exchange rates, reign in the economy's 13.7% inflation and create growth.

Government spokesman, Mohammad Baqer Nobakht, confirmed that the government expects to fall short of its planned income as it nears the end of the fiscal period, forcing it to run a deficit next year.

Reliance on hydrocarbon sales will decline, whether by choice or predicament. State-owned Bank Melli's chief executive, Abdolnasser Hemmati says only a quarter of next year's fiscal expenses will be paid by oil sales, IRNA reported.

This may be the only real plus side to Iran's depleting oil income. Iranian governments have rarely controlled their thirst for spending petrodollars.

Oil's new price level will force the current government to make better fiscal plans. If governance changes are kept intact in future, Iran will have a more robust economy.

For now, however, the government needs as much money as it can gather. This includes oil money. So, it plans to pump out more oil next year.

"If the Oil Ministry manages to increase output by 500,000 barrels per day, as it has promised, it expects to make $13.5 billion to $14 billion from oil next year," said Deputy Minister of Industries, Mining and Trade Mojtaba Khosrotaj.

The government has tentatively put down a $40 per barrel price for its crude sales in the budget of the next fiscal year, starting March 20. Oil Minister Bijan Namdar Zanganeh has dismissed considering lower prices, saying it would send a wrong signal to markets.

Further decline in the price of oil bellow $30 per barrel would dwindle Iran's oil revenues to $9 billion a year, according to Khosrotaj.

Brent crude oil settled up 82 cents at $37.28 a barrel, rebounding from a near 11-year low of $36.10 hit earlier in the session. For the month, it was down 16% and for the year, it fell 35%. In 2014, Brent lost 48%.

WTI oil rose 44 cents to $37.04 a barrel. It slid 11% in December and 30% for the year, after a 46% loss in 2014.