Brent crude’s price has fallen to its lowest level in four years. Pierre Andurant, one of the most respected and successful fund managers in the oil industry, predicted late last month that oil prices could fall even further to as low as $50 per barrel, assuming that the Persian Gulf countries do not significantly cut supplies.
Rumors are already going around Tehran that the government will lower the reference oil prices for next year’s budget to $70.
As US shale production booms, it seems that oil prices are going to stay low for the coming years, according to some oil experts. Iran’s most appropriate response would be to exploit this opportunity to diversify and increase non-oil exports. The Iranian government has realized this and is working on it.
Iran’s oil exports have been severely reduced after the economy, including the oil and banking sectors, became the target of western sanctions in recent years. When President Hassan Rouhani came to power in August last year, oil prices had already fallen from their previous 2008-9 peaks. In response, the new government announced it would focus on increasing non-oil production under an economic program to build a “resistance economy” against external pressures.
However, since the signing of the interim agreement in Geneva last year between Iran and the P5+1 (the US, Britain, Russia, France, China and Germany), Iran’s oil exports are estimated to have grown to more than 2 million barrels a day, up from slightly more than one million bpd in October, according to Reuters.
The large difference between oil exports’ share and non-oil exports’ share in the annual budget is that oil revenues accrue directly to government coffers while a portion of the non-oil industries are private and the government only collects taxes and export tariffs on them. However, large industries, such as the petrochemical industry, which is administered by the National Petrochemical Company, have remained in the hands of the government, as stated in the Article 44 of the Constitution.
Currently, China, Iraq, the United Arab Emirates, Afghanistan and Turkey are Iran’s largest non-oil export destinations. In the past Iranian year (ending on March 21, 2014), the value of non-oil exports amounted to $33 billion. Over the years, the country has done its best to increase this figure.
Latest data shows that non-oil exports have exploded in a relatively short time-span. A decade ago, in the Iranian year 1382 (ending March 21, 2004), non-oil exports were worth less than a fifth of the current figure, estimated at $7.6 billion. In the year ending March 1998 non-oil exports amounted to only $3.1 billion.
In October, the Trade Promotion Organization of Iran (TPOI) announced that non-oil exports would hit $61 billion at the end of the current year (ending March 2015). An earlier estimate had put the number at a more humble $37.7 billion.
Non-Petrochem Alternatives
However, Iran seems to be suffering from a double export dependency. The first is oil dependence and the second is non-oil dependence on petrochemicals. The National Petrochemical Company has announced that petrochemical products account for 40 percent of non-oil exports. Ironically, petrochemicals are a sub-branch of the oil industry, highlighting the seeping prevalence of oil even in what is not officially put under the oil exports rubric.
Since last year, the government has done much to increase bilateral ties with neighboring and other countries in order to increase non-oil exports and increase the relative importance of non-petrochemicals. One successful industry has been cement, whose exports, particularly to Iraq and Afghanistan, have profited from bilateral treaties signed by the Rouhani administration. Cement is also Iran’s largest export product to Iraq.
A July report by the OECD showed that Iran’s reliance on a few non-oil export partners is dangerous for the economy and not conductive for exporters. However, the report noted that the most pertinent cause is the lack of bilateral trade treaties, which Iran has been unable to obtain due to international sanctions and restrictions.
Another important reason that is often seen as keeping non-oil exports down is tariff regulations, but Iran says it has taken positive steps in this regard. In September, for instance, lawmakers decided to exempt non-oil exports from taxes completely and lower taxes for the export of raw materials to 20 percent.
Mahmoud Bazaari, the chief executive of the bureau of export promotion at the TPOI, stressed the importance for Iran of becoming a highly trusted and wanted partner with those countries with which it already has trades, specifically Iraq and Afghanistan to its west and east. Bazaari argued that Iran should do more to export high-quality products to neighboring countries.
The absence of western countries in this picture is compensated in more traditional trades, such as saffron, carpets, pistachios, dates and raisins. These goods have continued to be supplied to western costumers despite sanctions imposed against Iran’s economy in recent years. Although these trades have high added value, they only cover a small percentage of the government’s revenues on exports and are therefore not of prime but of symbolic importance.
Iran has also been actively looking for gas trading partners. It seems that, with conflict raging in eastern Ukraine, Europe has in fact found Iran. The continent has been very interested in Iranian gas. However, Iran is currently still not a net exporter of the product and many estimate that it will still take years for Iran to start exporting gas on a large scale to Europe, though it has, after Russia, the world’s largest proven gas reserves.
