Following the discontinuation of US oil waivers as of 2 May, Iran did not receive any major orders from international buyers until 16 May, when Chinese refineries restarted their purchases. China had stocked up on Iranian oil in order to make up for the potential loss, but Chinese buyers reportedly lifted 2 million barrels of oil two weeks later.
Iran now hopes that state-owned Chinese refineries will continue to defy US sanctions and purchase about 300,000 b/d. The country hopes to export an additional 500,000 b/d through direct and indirect routes – especially via Iraq – taking the total to 800,000 b/d for the next few months. This is still well below the planned 1.1 million b/d, but much better than the US vision of driving Iranian exports to zero.
Iran is continuing to offer discounts and favourable terms to buyers of its crude oil and to maintain floating storage across key markets so that it can benefit from spot market demand.
Even though the petroleum sector’s contribution to the economy is no more than about 20%, Iranian oil and gas revenues have a huge significance because they form the main source of hard currency for the Iranian government. On average over the past decade, oil and gas exports generated US$67 billion annually for the Iranian economy. This year, if trends continue, the figure will be about US$20 billion. That will not only lead to a budget deficit but will also undermine overall social welfare.
The silver lining is that the situation represents an opportunity to address structural deficiencies. Supreme Leader Ayatollah Ali Khamenei has instructed the executive and legislative branches to present a plan to adjust their budgeting procedures in order to reduce dependence on oil and gas export revenues. The deadline is 20 July.
The most significant tools at the government’s disposal will be improving the efficiency of infrastructure spending and revising its approach to subsidies. One proposal is to scrap the fuel subsidy and instead offer a virtual subsidy in the form of debit cards with which low-income citizens can purchase basic goods from government outlets.
The main goal would be to constrain spending and focus support on low-income households without causing an explosion of liquidity. The biggest losers under current conditions are those with the lowest income, who have no cars to benefit from fuel subsidies and who have seen their purchasing power diminish as inflation rises.