Iran is nearing a critical financial situation as a U.S. naval blockade threatens to diminish its seaborne crude oil revenues by mid-December. This economic strain is likely to impact everyday Iranians more significantly than the military, which the U.S. aims to restrict.
According to energy intelligence firm Kpler, Iran’s floating oil inventory outside the blockade has dropped to zero. It suggests that Tehran’s crude revenue could vanish by mid-December, as outstanding payments are settled.
However, a loss in oil revenue doesn’t immediately mean a funding crisis for the military. Iran might cut civilian programs instead, which could lead to inflation and decreased purchasing power while relying on alternative revenue sources.
The blockade complicates Washington’s strategy, since it might impact Tehran’s cash flow without directly starving the military and the Islamic Revolutionary Guard Corps of operational funds.
Currently, oil makes up about 30% of Iran’s government budget, as noted by experts Gregory Brew and Miad Maleki. Earlier this year, Iran expected to export around 1.7 million barrels per day at approximately $54 per barrel, but actual exports have fallen short, though higher prices have provided some financial buffer. When considering indirect income, oil and refined petroleum products may account for between 50% and 60% of government revenue.
The anticipated December deadline doesn’t imply an immediate financial collapse. As Maleki explained, it represents more of a disruption in cash flow rather than a complete budgetary crisis.
Inflation and a depreciated rial have allowed Tehran to manage some of the pressure, avoiding abrupt cuts to salaries or major shortages. Nonetheless, the declining purchasing power is a concern for ordinary citizens.
Blocking a revenue source that finances roughly a third of the budget will force the government into tough choices, like reducing spending, increasing borrowing, or accumulating larger deficits. Aggressive cuts could affect subsidies and pensions, while deficit spending might exacerbate inflation.
Brew highlighted expectations of significant reductions in government spending for the coming year. It’s likely that a larger portion of the budget will stem from borrowing, ultimately contributing to inflation increases.
Interestingly, military spending might not be as adversely affected. There’s a prevailing expectation that non-military expenditures will be slashed while military funding could be maintained or even boosted, given the current war-like stance of the Iranian regime.
Interestingly, Iran is currently redirecting resources towards rebuilding military infrastructure, including missile production facilities and compensating for damage to its nuclear program.
The military also has direct links to Iran’s oil trade. Reports from the Treasury Department indicated that Tehran allocated around 200,000 barrels of oil per day to its armed forces, worth an estimated $10 billion annually. These sectors sometimes sell oil and utilize the proceeds for various purposes, including supporting groups like Hezbollah and Hamas.
The IRGC has expanded its economic influence through methods like smuggling and black-market commerce amid heightened sanctions, still benefiting from the overall pressure on the nation’s economy.
Iran’s oil situation has been developing for months. Before the conflicts escalated in February, Tehran held approximately 135 million barrels in floating storage, which allowed for continued sales even after U.S. intervention. However, that inventory has now been used up.
U.S. Central Command estimates that the blockade has already cost Iran around $25 billion in oil revenue. It’s worth noting that buyers usually finalize payments a month or two after delivery, creating a gap between the reduction in floating inventory and the predicted revenue cutoff.
Even with these challenges, it’s unlikely that Iran will cease earning from hydrocarbons entirely. Some smaller quantities may still be transported overland, while refined products could be exported via alternative routes.
Experts assert that while formal oil exports from Iran may have reached zero, it doesn’t mean all sales have completely stopped. The volume may be minimal, but it’s anticipated that it will still exist to some degree.
Both analysts agree that a negotiated agreement with Washington could allow Iranian tankers to resume their activities, potentially altering the current financial outlook. If not, the pressure is expected to intensify in the following year.
A significant test will occur in March when Iran’s fiscal year begins, requiring it to reconcile its spending strategies with markedly lower oil revenues. Brew noted that this could lead to pressures surrounding budget releases and could trigger economic unrest as spending cuts are enacted.
By that point, Tehran may have endured months without its usual crude income, compelling the regime to consider the extent of the financial strain it is willing to carry before affecting its populace while trying to maintain other expenditures.
