The effect of low oil prices and end of Iranian sanctions (Fareed Zakaria's arguments)

By Fareed Zakaria

Thursday, February 4, 2016

One of Donald Trump’s stock campaign lines is that the Iran nuclear agreement was “terrible.” I’m beginning to wonder whether that’s true, but from the other side. Iran has ended up with a much worse deal than it expected. Remember, Tehran 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 signed an interim agreement in 2013. That year, oil was hovering around $100 a barrel. Iran’s great rival, Saudi Arabia, was thriving, with an economy that had grown about 6 percent in 2012. Spending lavishly at home and abroad, its 2013 budget had swelled, up 19 percent.

Iran, meanwhile, was isolated with a shrinking economy. The real prize for Tehran was not the return of its funds frozen in banks in Asia and Europe due to international sanctions (about $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 2015, Iran’s oil and gas revenue could reach $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 of less than $30 a barrel. Bloomberg News calculated that the country is making $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 program.

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, because of sanctions, there is great resilience in both the economy and society, as Moody’s has pointed out. This is not the case in many other large countries that are reeling under the hammer of falling oil prices.

Look at neighboring Iraq. The New York Times’s Tim Arango painted a picture of a country “in the midst of an expensive war against the Islamic State that is now facing economic calamity brought on by the collapse in the price of oil, which accounts for more than 90 percent of the Iraqi government’s revenue.” He noted that almost 8 million Iraqis depend on government salaries, which cost nearly $4 billion a month. Total oil revenue is now less than $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.

Elsewhere, Venezuela, long mismanaged by Hugo Chávez and his successor, is on the verge of default and worse. The economy shrank 10 percent last year. It is expected to shrink an additional 8 percent this year, and inflation will run at a Weimar Republic-like 720 percent, according to the International Monetary Fund. As The Post’s Matt O’Brien wrote, “The only question now is whether Venezuela’s government or economy will completely collapse first.”

When asked recently what keeps her up at night, IMF chief Christine Lagarde cited petro-states such as Nigeria, where 90 percent of exports and 60 percent of government revenue come from oil sales. Surging on the back of this crisis is Boko Haram, which surpassed the Islamic State as the world’s deadliest terrorist group in 2014, killing 6,644 people that year.

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 with problems. The answer, economists say, is to embrace structural reforms, wean economies away from national resources, and invest in other industries and human capital. That’s hard to do anytime, but especially when your country is in free fall.

In any event, the governments of oil-producing nations everywhere desperately need cash, simply to pay salaries and meet basic obligations. That means they will pump out as much oil as they can, which adds to supply and keeps prices low. Welcome to the new world of cheap oil and perilous politics.

(c) 2016, Washington Post Writers Group

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