Hojjatollah Ghanimifard

Some 100 years after the first oil eruption in Masjed Soleiman, the Iranian oil industry is producing more than 4 million barrels per day to be the second producer of OPEC. This figure will look even more important when we take into account that oil industry workers should not only try to increase output from Iran’s hydrocarbon resources, but also make up for an annual output fall of more than 200,000 barrels.

Producing more oil would mean earning more foreign exchange revenues, which would be translated into more prosperity for the country and realization of the 20-Year Perspective Plan goals. Of course, at present, basic factors are not determining international oil prices and a judgment about the trend of crude oil price and its effect on Iran’s economic conditions can be made by focusing on non-fundamental factors and their impact on developments in international oil market.

Reduction in refining capacity, changing seasons and political conditions are playing their role as psychological factors that affect oil price at international markets. However, a major factor which affects the market, but is easily overlooked is the amount of liquidity in energy market.

Due to problems faced by the American banking system and payment of loans which cannot be repaid on time, like mortgage loans, in addition to problems resulting from labor strikes in some crude oil producing countries, investors have had to pour more money into the energy market.

Mergers of a number of financial institutes during 1990s have reduced financial capacities of banks and the least disruption in their operations may lead to their bankruptcy. As a result, banks are forced to make large-scale investments in stock exchange markets in order to gain immediate profits and prevent possible losses. Therefore, transactions in financial markets, especially the energy market, have been more numerous compared to a few years ago and the international crude oil market is facing conditions which are not determined by traditional factors and have not been predictable by market activists.

Devaluation of the dollar against other powerful currencies is another problem. This problem is especially plaguing countries which sell their oil in dollars and devaluation of the dollar means lower purchasing power for them. Therefore, banks are paying increasing attention to the stock market, especially the energy market, where devaluation of the dollar is compensated through stock market operations which produce immediate gain.

Under the current circumstances, presence of a large amount of cash in the oil market is the main reason for high prices and due to economic recession in the United States, has cast doubts over future prospects of some American industries. Therefore, part of the cash which should have been invested in industries has been re-channeled into the energy market and even other markets like metals, precious metals and agricultural products.

Based on a calculation by secretariat of the Organization of Petroleum Exporting Countries, the present oil prices of 103-105 dollars per barrel are equal to 32 dollars per barrel based on 1980s prices and, therefore, the present high oil prices should not be considered real because in return for high prices, oil producing countries are receiving price of their oil only in nominal and not real rates. In fact, oil-rich countries have to use the dollar in their transactions and, therefore, they are receiving a foreign exchange which is losing in value on a daily basis. In this way, those oil exporting countries which have converted their oil revenues to other currencies have, at least, prevented their purchasing power from falling down.

The reality should not be ignored that inflation in global economy accompanied with increased global oil prices will also increase price of other energy carriers like natural gas and this means increase in price of energy needed by many industries. Consequently, the price of all goods whose production is directly and indirectly dependent on that energy will rise. This trend means that oil-producing countries would have to pay more on technical services needed for production and will be facing many difficulties for developing their oil resources. Even in some instances, they may not be able to continue with their projects because they would have to cover the losses suffered by contractors. Due to these conditions, oil producing countries will be facing very high costs for production of oil and gas and many of their projects may even become uneconomical. This will further push up oil prices in international markets.

Since oil producing and exporting countries are dependent on oil for their revenues, increased oil prices will be translated into higher revenues for those countries and this will increase governments’ ability to implement projects.

It should be noted that increased prices has not simply occurred in international markets, but also includes oil product markets and has increased prices at international gas markets too. On the other hand, shortages resulting from drought and use of some agricultural products to produce clean energies as substitutes for fossil energies, has greatly increased price of agricultural products. Price of wheat and oat has increased more than 96 percent during the past few months and the lowest increase has been observed for sugar, which was higher than 35 percent. Due to this trend, countries importing agricultural products were facing many problems because they will have less foreign exchange for imports at their disposal and this will increase demand for loans from industrialized states. Those loans will burden high interest rates on impecunious countries and subsequent demands to extend repayment period of loans will have political consequences for cash-strapped states.

Experience has shown that exerting economic control over poor countries will be more acceptable for countries which are economically well-off than a world in which a correct trend of growth and development governs. Therefore, they are trying to control economies of developing countries by increasing oil price which would be followed by rapid increase in price of goods and services imported into those countries.