Unrest further isolates Iran’s reeling economy

updated 2:24 p.m. ET June 22, 2009

CAIRO - Political uncertainty and unrest in the wake of Iran's disputed presidential election are casting a deeper pall on the country's prospects of a near-term economic recovery, with the vital oil sector likely to witness a stasis it can ill afford amid faltering production and investments.

Under the best of circumstances, President Mahmoud Ahmadinejad may have been able to seize upon President Barack Obama's overtures to Iran and gradually bring about an end to the U.S.-led international isolation the country's oil sector has endured.

But the mass protests and cries of foul by opposition rival Mir Hossein Mousavi and his followers over alleged election fraud could prove to be a further impediment to bringing in foreign oil firms, many of whom have avoided Iran because of U.S. sanctions and Western concerns about the country's disputed nuclear program.

"Seeing how the aftermath of the elections have played out — with this deep cleft with the ruling elite being quite exposed now, it's quite hard to see Ahmadinejad even being on the winning side after meeting protests with violence," said Samuel Ciszuk, Middle East energy analyst with London-based IHS Global Insight.

The hardline government will likely "have to deal more with domestic issues for the rest of the year, at least, with a clear focus on solving the domestic situation."

It's a delay Iran cannot afford.

The economy was a major issue in the run-up to the June 12 election, with critics accusing Ahmadinejad of squandering the country's windfall from oil's record rally in the first half of 2008 on populist projects aimed at appeasing his core rural constituency.

The country, which according to the U.S. Energy Information Administration is home to the world's third largest proven crude oil reserves, has grappled with inflation still near 25 percent even as other major oil producers in the region have seen inflation rates drop sharply.

Unemployment remains high at almost 20 percent, and the collapse of oil prices in the second half of last year threatened to sharply erode the Tehran government's ability to sustain the subsidy program it uses to curry favor with its supporters.

Compounding these problems is Iran's continuing battle with declining oil output — an annual fall of between 4 to 8 percent, or roughly 200,000 to 350,000 barrels per day, according to analysts. The International Monetary Fund last year said Iran needs roughly $90 per barrel to stay in the black in terms of its budget — one of the highest levels among the Organization of the Petroleum Exporting Countries member states.

Rounding off its litany of troubles is that its new export projects are riddled with delays and a lack of gas treatment facilities to cope with the new output means that production is being burned off instead of sold.

To boost economic growth, Iran needs to compensate for that decline through investments and technology, the two main elements it has been unable to secure enough of because of the sanctions.

"The political situation has brought the country to a standstill," said Raja Kiwan, a Dubai-based analyst with consultancy PFC Energy. "We can all see that it's a temporary situation, but it does not do the country any favors at a time when its already reeling from low oil prices."

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