Iran General NewsWeaker oil may crimp Iran's spending

Weaker oil may crimp Iran’s spending

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ImageWall Street Journal: If dramatically lower oil prices last, they could eventually threaten Iranian President Mahmoud Ahmadinejad's free-spending policies at home and the country's expansionist ambitions across the Middle East.

The Wall Street Journal

By CHIP CUMMINS and FARNAZ FASSIHI

ImageIf dramatically lower oil prices last, they could eventually threaten Iranian President Mahmoud Ahmadinejad's free-spending policies at home and the country's expansionist ambitions across the Middle East.

But the Islamic regime's substantial petrodollar piggy bank means Tehran may be able to weather an oil-price downturn for a while. The upshot for whoever wins the White House in November: Lower oil prices may temper Iran's recent ascendancy in the Mideast, but don't count Tehran out anytime soon.

Recent high oil prices have helped Iran gain clout across the region, at the expense of American influence. Tehran has flooded its neighbor Iraq with cheap exports of goods, bolstering ties with Iraqi government officials, many of whom Iran sheltered during the regime of Saddam Hussein.Iranian-funded militant group Hezbollah won new power this summer in Lebanon's government, in a rebuke to that country's Western-backed politicians. And Iranian-supported Hamas has consolidated power in the Gaza Strip, enfeebling rival Palestinians allied with Washington.

While U.S. and United Nations sanctions aimed at curbing Iran's nuclear program have increased costs and red tape for Iranian companies doing business overseas, Iran's mounting oil revenue has cushioned the blow. The government has provided subsidies for food and fuel, and petrodollars have helped to fund growing imports, especially of raw materials used in Iran's manufacturing sector.

That will be harder to do if crude falls further and stays low, however. U.S. benchmark crude for December delivery fell $3.69 on Friday, or 5.4%, to $64.15 on the New York Mercantile Exchange. The International Monetary Fund estimates that Iran needs to fetch $75 a barrel for its crude, or risk a current-account deficit as early as 2010. Iranian crude typically trades at a discount to the U.S. benchmark.

The sharp fall in oil prices already has Iranian officials warning of the prospect of leaner days ahead. Mr. Ahmadinejad's central-bank governor late last week called for a reduction in imports of luxury and nonessential goods, a move that could help stave off a current-account deficit.

If oil revenue fell, Mr. Ahmadinejad would face pressure to curb his spending. He has pressed banks to provide easy credit, jacked up state salaries, and doled out other populist perks.

But the country still has a significant cushion. Foreign reserves held at the central bank were estimated at just under $82 billion in the Iranian fiscal year that ended in March, up from $46.8 billion two years ago. That includes proceeds socked away in the Oil Stabilization Fund. Mr. Ahmadinejad has used the rainy-day fund to shore up budget deficits for the past three years.

Accumulated reserves and low domestic debt "suggest Tehran should have the financial wherewithal to finance modest fiscal and current account deficits, at least over the short term," analysts at Washington-based PFC Energy wrote this week.

Moderating global prices for oil and other commodities might even help Tehran in the long run if they force Mr. Ahmadinejad or the parliament — increasingly hostile to the president, accusing him of economic mismanagement — to tighten fiscal discipline. That could help curb inflation, which is running at an annual rate above 24%, according to the IMF.

"If he has less money in his hand, it will be harder to spend," says Manouchehr Takin, a former Iranian oil executive who is now an energy analyst at London's Centre for Global Energy Studies.

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