One of Donald Trump’s stock campaign lines is that the Iran nuclear agreement was “terrible”.
I’m beginning to wonder if that’s true, but in a sense opposite of what he means. Iran has ended up with a much worse deal than it expected. Remember, Teheran entered the negotiations in the heady days of high oil prices. As the Iranians are discovering, it’s a new world out there.
Put yourself in Iran’s shoes. The Islamic Republic got serious about negotiating and eventually signed an interim agreement in 2013. That year, oil was hovering around US$100 (RM414) a barrel. Iran’s great rival, Saudi Arabia, was thriving, with an economy that had grown about six per cent in 2012. Spending lavishly at home and abroad, its 2013 budget had swelled, up 19 per cent.
Iran, meanwhile, was isolated with a shrinking economy. The real prize for Teheran, was not the return of its funds frozen in banks in Asia and Europe due to international sanctions (totalling around US$100 billion). It was finally getting back into the markets as the second largest oil producer in the Middle East and reaping the riches of the boom. In 2010, Iranian officials were predicting that by last year, Iran’s oil and gas revenues could reach US$250 billion annually. That’s what they were banking on when making their concessions.
Last month, Iran’s oil began flowing into the marketplace, with prices under US$30 a barrel. Bloomberg News calculates that Iran is making US$2.35 billion a month on its oil sales. That’s not quite the prize that the Islamic Republic was expecting for giving up its nuclear programme.
Still, Iran will probably be able to handle the oil bust better than many other petro-states. Its economy has diversified to some degree and, thanks to sanctions, there is great resilience in both the economy and society, as Moody’s points out. This is not the case in many other large countries that are reeling under the hammer blow of falling oil prices. Look at neighbouring Iraq. Tim Arango of The New York Times paints a picture of a country “in the midst of an expensive war against Islamic State (IS) that is now facing economic calamity brought on by the collapse in the price of oil, which accounts for more than 90 per cent of the Iraqi government’s revenue”. He notes that almost eight million Iraqis depend on government salaries, which cost nearly US$4 billion a month. Oil revenues are now less than US$3 billion a month. A senior Iraq politician told me that Iraq might not survive as a nation if oil prices stay low for long.
Around the globe, Venezuela, long mismanaged by Hugo Chavez and his successor, is on the verge of default and worse. The economy shrank 10 per cent last year. It is expected to shrink an additional eight per cent this year, and inflation now runs at a Weimar Republic-like 720 per cent, according to the International Monetary Fund (IMF). As The Washington Post’s Matt O’Brien writes: “The only question now is whether Venezuela’s government or economy will completely collapse first.”
When asked recently what kept her up at night, IMF chief Christine Lagarde cited petro-states like Nigeria, where 90 per cent of exports and 60 per cent of government revenue come from oil sales. Surging on the back of this crisis is Boko Haram, which surpassed IS as the world’s most deadly terrorist group in 2014, killing 6,644 people.
As Nigeria’s government battles Boko Haram in the north, it also faces the possibility of renewed violence in the south in the Niger Delta, home to much of the country’s oil. At its worst, the southern insurgency there shut down half of Nigeria’s oil production.
The insurgency ended with a fragile peace and amnesty for the insurgents in 2009. But the government does not have the cash to follow through on many of its promises. Now it could end up struggling against two brutal movements that could tear the country apart.
There are other oil states, not quite as challenged as these, but most of them have problems. The answer, economists say, is to embrace structural reforms, wean economies away from natural resources, and invest in other industries and human capital. That’s hard to do anytime, but especially hard when your country is in free fall.
In any event, oil-producing nations everywhere have governments that desperately need cash, simply to pay salaries and meet basic obligations. That means they will pump as much oil as they can, which further adds to supply and keeps prices low. Welcome to the new world of cheap oil and perilous politics.
Fareed Zakaria is an American journalist and author. He is the host of CNN’s Fareed Zakaria GPS and writes a weekly column for ‘The Washington Post’