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Cheap Oil Poses New Challenge for Iran’s Economy

Oil Refining Machinery
Written by OIAC-US

Iran owns roughly 10% of the world’s proven petroleum reserves, and they continue to find more sources each year. In time, this will make them one of the wealthiest nations since oil and gas usually have a large demand. But, because of the pandemic and the rocky Iranian-US relations, they can no longer use this to their advantage, significantly affecting their economy.

The State of Iran-US Relations

The situation worsened in 2018 after the US withdrew from the 2015 nuclear deal and placed heavy sanctions on Iran. The Middle Eastern nation has since been banned from selling large amounts of oil to the US and its allied states. To make sure this happens, nations that purchase more than the specified number of barrels will be facing repercussions.

The Trump administration’s maximum pressure on the Iranian government has forced them to sell their oil to China and smuggle other products through back channels for their economy to thrive. But, even the East Asian power is being recommended to cut off oil trade with the Islamic country. Although Iran can increase its petroleum exports, its revenue stays minimal since they have to trade it for a low $10. That’s way below normal oil prices.

Oil exports alone constitute 10% of Iran’s budget, and plummeting prices are negatively affecting the country’s economy. It’s the average citizen who feels its effects the most. They struggle with low income and high inflation rates, so it’s harder to purchase basic needs. Funding for different sectors will receive a huge blow if the country doesn’t meet its target revenue.

The Effects of the Pandemic

Recent data has shown the extent of the pandemic’s negative effects on the oil market as well. The global lockdown has forced people to stay at home and limit their use of vehicles. Many flights have also been canceled because of restrictions to international movement. Although not intended, these have led to massive losses in petroleum sales.

The drop in demand, prices, and revenue has forced exporters to pay midstream oil companies to prevent being hit with more losses. But, some corporations won’t be able to recover from this and will eventually be forced to shut down. This will entail job loss, which will take a toll on the country’s tax revenue.

Many oil-producing countries have felt the impact of COVID-19 on the petroleum market. And, on top of low prices and harsh sanctions, Iran will have to deal with the pandemic. This historic price swoon is expected to continue until the second half of the year, which threatens the country’s oil industry.

Worsening Economic Recession

Iran’s worsening economic problems will lead to plenty of other complications, and it’ll affect the private sector the most. It’ll be quite the domino effect: forced business closures will result in high unemployment, which will, in turn, lead to an increase in poverty. If ordinary individuals can’t afford their basic needs, it’ll affect their welfare. They won’t have enough to eat, children won’t be able to attend school, and some won’t even have the money to pay rent.

Iran’s economic problems need to be resolved immediately to prevent complications. In its current situation, it will be hard for the country to do this alone since globalization requires everyone to rely on each other. So, nation-states should help them get back on their feet. Contact the Organization of Iranian American Communities to learn more about the matter by participating in an Iranian-American forum.

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