For the investing public, the global oil market has been looking better of late. At the start of the month, the price for a barrel of West Texas Intermediate crude oil was trading at $10, but as of early Monday it was a little over $24.
But it isn’t just investors and oil traders who follow prices like this – so does Israel’s defense establishment. The main reason they do is the impact the oil price has on Israel’s archenemy, the Islamic Republic of Iran.
Back in December, oil was more than $60 a barrel, but the current price and the recovery this month hardly spells good news for Tehran. At the start of 2018, it had been producing 2.5 million barrels a day and the collapse of oil prices, combined with the impact of the coronavirus and U.S. sanctions, have left its economy reeling.
Before this perfect storm struck, oil accounted for 15% of Iran’s gross national product. The U.S. sanctions had been imposed gradually. A year ago Iran was still producing 1 million barrels a day because Washington had given waivers from sanctions enforcement to importers like Japan, China and South Korea. But these waivers ended a year ago, cutting Iranian production to just 500,000 barrels a day and exports to a mere 300,000.
Even that paltry level of output has shrunk in recent months due to plunging global demand for oil as a result of the coronavirus pandemic. And if that were not enough, the price of oil plummeted, too, meaning Iran was not only selling less oil but getting less money for the little oil it did sell. Worse still, Iran offers buyers discounts on the market price to compensate them for the risk of skirting sanctions, cutting even more deeply into revenues.
The petroleum industry accounts for about 55% of Iranian exports. That’s not just crude oil, but overseas sales by its key petrochemical industry, which has also been hit by slumping global demand and prices. Many of its petrochemicals facilities have been fully or partly shut down by the coronavirus lockdown.
Officially, just 85,000 Iranians in a country of 81 million people have been infected by the virus and about 5,000 have died. But the regime, which has had a poor record on transparency, is believed to be concealing figures showing a much higher rate of contagion.
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Before the perfect storm, Tehran could count on oil revenues to cover 30% of its budget. But in the current fiscal year, which in Iran begins in March, using the Persian calendar, the government assumed that oil would account just 10% of its revenues. Even that figure is wildly unrealistic – it assumed that the oil price would be $50 and that Iran would be selling 1 million barrels a day.
Tehran has limited ability to increase its national debt to make up for the oil losses because U.S. sanctions keep it out of the global capital markets.
The depth of Iran’s troubles has been evidenced in its appeal for a $5 billion loan from the International Monetary Fund – its first such request in more than half a century. In addition, Ayatollah Ali Khamenei, the country’s supreme ruler, has authorized President Hassan Rohani to take $1 billion out of the National Development Fund, Iran’s sovereign wealth fund. The government has allocated just $300 million for food subsidies and unemployment benefits so far, despite the severe economic distress.
What’s left is for the regime is to decide where to cut spending. Among the key choices it faces is whether it’s going to cut the subsidies for food and fuel it has traditionally provided ordinary Iranians or cut its defense budget. Back in November 2019, it opted for the first and set off a wave of protests and strikes. The regime will think twice before trying that again.
Tehran’s economic woes have a direct impact on the strategic threat it poses to Israel: For the foreseeable future, Iran will have less money to give to Hezbollah and Hamas and to finance its military ambitions in Syria. And here, the story now moves from Tehran to Jerusalem and the dialogue between the Defense Ministry and the treasury on the army’s budget.
The conclusion that the Israel Defense Forces’ brass makes from Iran’s woes is that Tehran may be more ready than ever to risk conflict with Israel in order to project power and/or in order to alleviate domestic pressures. The fact is Iran simply doesn’t have the financial resources to challenge Israel directly and doing so would create serious risks for the regime. But it may opt for a less costly and less risky indirect conflict that relies on guerilla warfare fought on Israel’s Golan border.
The IDF is alert to this and has teams that are now working on such a scenario and the budgets it would require. At the same time, it is fully aware that in the post-coronavirus world, there will be less money for defense than otherwise.
It’s not just about the defense budgets of Israel and Iran, but defense budgets around the world. At the Finance Ministry, officials are already trying to assess the impact that will have on state-owned arms makers, mainly Israel Aerospace Industries and Rafael, and their ability to pay the government dividends.
As a result, the defense establishment now is preoccupied less with demands for billions of shekels in budget supplements and more with trying to convince the government to invest in defense projects that will aid the economy and boost employment.
For instance, at the start of next month a ceremony will mark the start of construction of the IDF’s central supply facility by the companies Oran and Shapir Engineering & Industry as part of the army’s move to the Negev.