Column:

Thursday February 26, 2009

Was I deceived, or did a sable cloud
Turn forth his silver lining on the night?

Those words were written in 1634 by John Milton. While very few of us can quote the poem verbatim, almost all of us have expressed the sentiment inherent in these words and said: every cloud has a silver lining.

The economic downturn we are now experiencing has rippled throughout the world. The news is not good and yet, every cloud, even this cloud, does have a silver lining. And while they are few in number, there are a few positive changes that have occurred specifically because of this colossal calamity. The number one change is worth discussing.

The most important change to have been brought about by the economic condition is the drop in oil prices.

Oil prices are down from the record high summer price of nearly $150 a barrel. The prices will remain down, hovering in the $30-$40 range, and may even drop a little lower before they go up again. Funny, isn't it, how what was such an all consuming worry and topic of conversation has been pushed to the sidelines and almost ignored. Sad, that very few of us have been able to enjoy the upside of the oil conundrum because of the downturn in the economy.

OPEC wants to drop production in order to increase prices. But to their chagrin, the general demand for oil has dropped. So even if OPEC drops the price their short term benefit will be minimal. In an ideal world, OPEC would have the price of oil even out at between $75-$85 per barrel.

And who is the most hurt by these low prices? Iran. Iran is hurting bad.

In truth, it's not just Iran. Venezuela and Russia are also suffering seriously because of the great drop in oil prices. But it is Iran that is most affected and interesting to us.

Iran is the third largest producer of oil in the world and yet, Iran must resort to importing its own gasoline. Iran has antiquated refineries and has not built any new refineries since they threw BP out a half a century ago. There's more. Iran not only imports gasoline, the Iranians have no real natural gas and must import that also.

It gets worse for Iran. Add to that an inflation rate that the present regime admits to be at 26% and the country is ripe for an economic implosion. Others, including Khatami who will be opposing Ahmadinejad in Iran's upcoming election on June 12th, put the inflation rate as high up as 65%.

The Iranians need the price of oil to be close to $80 a barrel so that they can break even. They are inefficient. They need subsidies. They need to import. They have almost no cash reverse from their product and they are hemorrhaging money. Iran also made the mistake of dropping the dollar as the official currency exchange link and adopting the Euro, a move that has not proved beneficial.

The picture for Iran is very bleak indeed. No amount of nuclear energy will be able to pull Iran out of this very deep hole.

During the "seven good years of plenty" Iran should have been investing, saving and improving their systems. That, they did not do. That's what Qatar did. Qatar improved its oil infrastructure and is reaping the profits of their investment. The break even point to produce a barrel of oil for Qatar is about $10, substantially lower than what Iran needs. Iran was expecting to earn well over $100 billion in oil revenues this year. With the slashed prices, that number will probably be way down at $20 billion.

So what does this mean? While it is tempting, there is no great pleasure to be had in wallowing in the misfortune of Iran. But what we can do is point a finger, and that finger is pointed at Mahmoud Ahmadinejad, the man responsible for the dramatic economic failure of Iran. Ahmadinejad ran for office on a platform that promised to improve and resuscitate Iran's ailing oil industry. And oil is the only real industry Iran has to export.

If the Supreme Leader, The Ayatollah Khamenei, would lift his head from the clouds and see Iran the way it really is right now, he would oust Ahmadinejad as President of Iran. The people might vote, but it is The Supreme Leader who determines the winner.

If Khatami, the former president and present political rival, wins the election that would be good for Iran. Khatami is less abusive. He is less of a bulldog when dealing with the West. He is more pragmatic and less prone to rhetoric. He understands the need to deal with oil. He understands the need to deal with economics.

OK, so maybe the cloud's lining isn't really silver. But neither is it completely black.

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