Iran feels sanctions pain as oil income slumps

Iran's state finances have come under unprecedented pressure and the resilience of ordinary people is being tested by soaring inflation as oil income plummets due to tightening Western sanctions and sharply falling oil prices, Reuters reported.

Tough financial measures imposed by Washington and Brussels have made it ever more difficult to pay for and ship oil from Iran. Its oil output has sunk to the lowest in 20 years, cutting revenue that is vital to fund a sprawling state apparatus.

Already down by more than a quarter, or about 600,000 barrels per day, from rates of 2.2 million bpd last year, shipments of crude oil from Iran are expected to drop further when a European Union oil embargo takes effect on July 1.

Tehran is already estimated to have lost more than $10 billion in oil revenues this year.

Causing even more pain, oil prices fell below $100 a barrel last week to a 16-month low amid a darkening outlook for economies in Europe, the United States and China.

Diplomats and analysts say Iran may offer the IAEA, the U.N. nuclear watchdog, increased cooperation as a bargaining chip in its negotiations with world powers, which resumed in April after a 15-month hiatus and are to continue in Moscow on June 18-19.

According to the International Monetary Fund, Iran needs oil at $117 a barrel to balance its budget, set at $462 billion. President Mahmoud Ahmadinejad has said the budget was designed to decrease Iran's dependence on oil revenues.

Senior Iranian oil officials have acknowledged that sanctions have reduced exports but say the country has long experience of finding ways around them and a drop in oil revenue is not the end of the world.

International sanctions have been a fact of life in Iran for decades and Tehran is adept at working round them.

But there are growing signs that ordinary people are feeling much more pain from them than in the past as inflation has soared in the last six months.

Inflation is now officially running at about 20 percent, although economists say prices of the goods most Iranians worry about are rising much faster.

The country is undergoing what the government has called major economic surgery, in the form of cuts to the multi-billion dollar subsidies which for years have held down the price of essential goods such as fuel and food.

Sanctions are also painfully reshaping flows of goods for small enterprises, with one owner of an import company in Tehran saying he was forced to fire some workers recently after being forced to source his purchases from China instead of Europe.

On the export front, several big European companies have halted purchases of Iranian oil and others are winding down.

Since early April, Tehran has been hiding the destination of its oil sales by switching off tracking systems on its tankers.

But barrels counted upon arrival in Iran's top four customers - China, India, Japan and South Korea - show a 20 percent decrease, or 357,000 bpd, so far this year, according to government data and industry sources.

That translates into a loss in revenue of roughly $35.7 million a day, or $4.3 billion in the first four months of this year, based on current Brent crude prices.

Iranian crude is sold at a discount of several dollars per barrel to benchmark dated Brent, so the actual losses are likely to be even higher.

Some relief has come from soaring prices earlier this year as Brent so far in 2012 is averaging $116 a barrel, up from 2011's $110, which was a record high. But reduced output and falling prices are making things worse very quickly.

Iran - OPEC's second biggest producer - could see a 39 percent decrease this year to $44 billion, while Saudi Arabia is expected to see a $3 billion increase to $294 billion.


/Reuters/