Economic Experts: End Reliance on Volatile Oil

Economic Experts: End Reliance on Volatile OilEconomic Experts: End Reliance on Volatile Oil

After over a year of marathon sessions Iran and the P5+1 (five permanent members of the UN Security Council plus Germany) on Monday decided to keep on talking for seven more months to bridge the yawning gaps and put their signatures on the long-awaited 'comprehensive agreement' on Iran's nuclear program. Even skeptics and doomsayers are cautiously hopeful that reason will prevail and the two sides will demonstrate pragmatism and wisdom in wrapping up one of the most complex cases in recent history.

The worsening Middle East crises and the pattern of declining oil prices (crude fell to below $70 on Friday), experts say, has given added momentum to the need to find a mutually-acceptable solution to the long-simmering nuclear dispute and gradually restrain the role of oil revenues in Iran's national economy.

However, come what may, one primary area that will be affected, for better or worse, is Iran's economy, and by extension the country's gross domestic product (GDP).

For over a decade, the sanctions imposed by the US, Europe and the UN Security Council have taken a serious toll on Iran's oil-based economy, which has witnessed negative growth in the past three years.

Add to this, the systematic decline in national production, lower exports and big jump in imports. With the rise in foreign exchange rates and reduced inflow of hard currency, the manufacturers and exporters are grappling with multiple hurdles. Hence, it can be argued that there exists a direct relationship between the outcome of the nuclear talks and the future of the economy.

Economic expert Mehdi Taghavi believes that Iran' economy will pick up "only after the sanctions are either lifted or suspended." The local press this week quoted him as saying that Iran's economy is largely dependent on oil exports. "Hard currency earnings from oil exports are sold by government to the manufacturers and importers in need of foreign currency," he noted and called for reducing reliance on low and highly volatile global oil prices.

There is also a direct relationship between the fate of the nuclear dossier and currency rates. "Lower exchange rates, resulting from lifting/suspension of the sanctions, would help cut production costs in the industrial units that have working relations with the outside world," Taghavi recalled.

Noting that oil prices at times give leverage to hostile powers against Iran, Hussein Raghfar, a university instructor and economic analyst, believes that the government in Tehran "needs to concentrate on curbing reliance on oil revenues by replacing it with alternative sources." He argues, rightly so, that the national economy's traditionally overdependence on oil exports makes it vulnerable to even slight fluctuations in the international price of crude oil.  

  Changing Paradigms

Criticizing the previous government's controversial economic policies and foreign relations, which "paved the way for harsher sanctions and economic decline," Raghfar referred to the "oil-based economy as the reason for its vulnerability to sanctions."  He called for efficient, workable and effective measures to "restructure the economic paradigms and reduce dependence on volatile and unstable oil revenues by expanding and supporting the production sector."

Crude prices plunged to four-year lows on Thursday -- below $70 a barrel -- after OPEC refused to cut oil production. There had been hopes that oil ministers of the Organization of the Petroleum Exporting Countries who met in Vienna would cut production in order to put a floor under prices that have fallen about 30% since mid-summer, when prices were elevated by geopolitical worries. Prices have steadily fallen since then because of a strengthening US dollar, lower demand prospects and, particularly, a glut of oil.

For years the likes of Raghfar and political and economic observers have begged national governments to rewrite the nation's economic agenda by first focusing on ways to curb dependence on oil.

Successive governments over the pasts two decades have 'talked' about ways to achieve such lofty goals. But the outcome has been all but impressive. To the contrary, some data has it that dependence on oil revenues has "increased rather than decreased" despite notable increase in non-oil revenues.

According to Raghfar, the nuclear talks with the six major powers will "yield positive results only after Iran succeeds in reducing its dependence on oil exports and is able to boost domestic production, hence diminishing the leverage they (big powers) have in the extended negotiations."  To underscore the critical point he mentioned the disturbing decline in international oil prices since summer that have effectively wiped off more than 30 percent of the revenues of oil exporting countries.