Iran has been pushed into a corner and is fighting for its life. The safest weapon in its arsenal is an economic strategy; and it is the one point where the United States is vulnerable.
There is no doubt about it. Section 1245 of the National Defense Authorization Act that was signed into law by President Obama on 31 December 2011 is having the intended effect upon Iran.
Unlike previous sanctions, Section 1245 attacks the foundation of the Iranian economy. The provisions of the law seek to stop the sale of crude oil and to block transactions between the Iranian central bank and the rest of the world. About fifty per cent of the national budget is funded from the sale of exported crude oil that provides eighty percent of the foreign exchange. "Crude (oil) sales are a trap which we inherited from the years before the (1979 Islamic) Revolution," Khamenei told a gathering of researchers and scientists at the end of July.
An immediate consequence of the legislation has been the plunge in the exchange rate of the Iranian Rial that has lost half its value against the U.S. dollar. A combination of devalued currency and a break down in international bank transfers has created shortages of imported products, including basic food grains. The result is seen in an official inflation rate of 25 per cent and an unemployment rate of 12.3 per cent.
Before the implementation of the sanctions, Iranian oil exports were the second largest in OPEC at 2.2 million barrels per day. Today, the current level is around 1.1 million barrels, but that does not take into account the oil leakage through the sanction barriers. A friendly government in Baghdad makes Iraq one of the easier routes to the world market. Shipments of gold bullion through Turkey to Iran indicate that the Iranians are selling to someone.
After nearly thirty years of dealing with American sanctions, the Iranians have developed methods of evading some of the restrictions, but the current application goes far beyond anything faced earlier. The National Iranian Oil Company has been forced to relinquish its monopoly of sales and authorised private traders to market the crude. The Oil Products Exporters Union expects to manage a fifth of exports and claims to have completed arrangements with refiners in Europe.
In spite of the evasive measures that are being employed, the Iranian treasury is still losing about thirty billion dollars per annum, a decline from seventy-two billion in 2011. Beyond that, reduced exports are causing a problem of what to do with the surplus. On shore facilities have been filled. Seven million barrels are being held at Sidi Kerir in Egypt.
That leaves the tankers as the only other storage choice. Half the Iran tanker fleet of forty-seven ships is already sitting at anchor with tanks full and no place to go.
The less attractive possibility is for the National Iranian Oil Company to continue shutting down wells. Already, production has declined from 3.5 to 3.3 million barrels per day.
Once they are shut down and the pressurising of the aging neglected wells stopped, saltwater seepage will make it costly and difficult to reactivate them. When they are reopened, production is likely to be reduced. This is the long-term damage that the sanctions will have upon the economy.
How long can they endure the losses? That is the question that the Ayatollah has to be asking.
So far, there are no signs that people are starving from food shortages, and there is no indication that people are taking their grievances into the streets. Regardless, Tehran cannot ignore the long-term damage to the economy and the potential for social disorder.
This article first appeared at oilprice.com on 6 August 2012.
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