Although the Iranian government insists that countries like China and Russia can make up lost Western investment in the petroleum sector, rising gas prices and stalled energy projects are signs that the regime is beginning to buckle under international sanctions.
The United States, Canada and Australia, as well as the United Nations and the European Union, have stiffened financial penalties over the last several weeks against Iran for its nuclear program, which Tehran argues is meant for civilian uses like power generation and medical purposes.
In recent weeks, Tehran has begun to feel "a lot of pressure" on the gasoline front, said Houchang Hassan-Yari, a professor of international relations at the Royal Military College of Canada in Kingston, Ontario. The government is now curbing from 100 liters to 60 liters (roughly 26.4 gallons to 15.9 gallons) the amount of subsidized gas consumers can buy each month, Hassan-Yari told OilPrice.com.
Iranian motorists must pay 100 tomans per liter of gas (less than 10 cents), "but if you purchase more than 60 liters, you have to pay 400 tomans per liter," he noted. "And there is no clarity about the situation in the next two or three weeks to two months in terms of volume but also [in] the price."
The increase has already begun to affect many aspects of Iranian life, including moving agricultural products to market, he said, citing the rising price of beef.
International players have targeted Iran's energy sector, the Islamic Revolutionary Guard Corps-Qods Force, and other areas of the economy. The oil and gas industry, the lifeline of Iran's economy, has been particularly hit. The country holds the world's third-largest proven oil reserves and the world's second-largest natural gas reserves, according to the U.S. Energy Information Administration. Iran, however, must still look overseas for refining capabilities.
As U.S. sanctions against Iran's oil and gas industry took hold, firms like Lukoil, Royal Dutch Shell, Total and Reliance stopped selling gas supplies to Iran. The government of Mahmoud Ahmadinejad, which needs Western technology to help modernize the energy sector, last March announced plans to seek a $200-billion investment in oil, gas and refinery industries over the next five years.
In another indication the energy sector is in trouble, the Revolutionary Guard has found it tough to drum up enough money to advance the so-called "peace pipeline," which is meant to transport gas from southwest Iran to Pakistan and potentially India and Bangladesh, Hassan-Yari noted.
The South Pars gas field -- "arguably the most important" of Iranian gas undertakings - has not attracted Western investors either, added Alex Vatanka, a scholar at the Middle East Institute in Washington. The government, however, has dismissed the impact of sanctions on its stalled South Pars activities and argued that it does not need foreign partners, Vatanka told OilPrice.com.
"The timing is more than just a coincidence," he said of the South Pars decision. "I think sanctions had something to do with how the Iranians went around and announced they're going to do it alone and at home."
Since then, Iran declared an intention to offer the first tranche of a $3-billion dollar domestic bond issue to fund the development of the South Pars field and will later make an international bond offering of two billion euros, according to an Aug. 15 Agence-France Presse report.
Liquefied natural gas, overall, may be in trouble. The government's recent decision to put on hold LNG development was probably not initially its intention, said Vatanka. Iran's closest rival in the gas industry is Qatar, a country doing "fine on the LNG front because they have access to money, technology and so forth," he said.
Although Iran was trying to catch up to Qatar, "suddenly they're throwing the towel in and saying they're going to . . . go with pipelines," Vatanka said. "I think it's a reaction to some squeezing of Iran on the sanctions front."
Despite the many countries joining the pro-sanction camp, Iran is not completely alienated. Earlier in August, China said it will invest $40 billion in its ally's oil and gas sector. Only days ago Venezuela announced plans to ship gas to Iran, and Russia may boost fuel shipments to the country as well. Turkey, also dependent on Iran for natural gas, plans to continue its relationship, while Sri Lanka said it would extend a crude oil deal with the Islamic regime.
It will be "tough to measure" the actual pain of international sanctions without a clear picture of the long-term impact of major energy project delays, Vatanka continued. Giving up a "crucial technology" like LNG because Iran cannot tap into needed Western expertise is a key example, he said, noting that the fuel represents Iran's future energy prospects.
How long Tehran can weather such external economic pressure is uncertain.
Ahmadinejad is already waging internal battles with the nation's conservatives. Not only are certain factions within Iran's parliament at odds with him over his economic policies, the regime's powerful clerics are critical about his handling of social issues like an appropriate dress code for women, Hassan-Yari, the Canadian academic, said. Some members of parliament have also taken aimat the president for a foreign policy
deemed "too adventurous," yet they have not specifically mentioned sanctions, Hassan-Yari said.
Eventually, Ahmadinejad's opponents may exploit the international community's financial punishment as justification for a "more imaginative economic policy" in Iran, said Vatanka. He added that the president would have to go if he fails to deliver on this front.
"It's that's kind of scenario that I can see," he noted, "if this fight continues among the hardliners.
By Fawzia Sheikh for Oilprice.com who offer detailed analysis on Oil, alternative Energy, Commodities, Investing and Geopolitics. Visit: http://www.oilprice.com
