The balance of pain

The World Bank has substantially upgraded its GDP growth forecasts for Iran in 2016 and 2017, as well as its estimate for 2015. Even with crude at an assumed $49/bl price this year, Iran is seen as the motor of Middle East and north African developing country growth.

By contrast, the bank has downgraded its forecasts and estimate for Saudi Arabia’s GDP, albeit leaving it firmly in positive territory.

Both revisions are driven by oil. For Iran, an end to sanctions will bring a 500,000-700,000 b/d year-on-year rise in crude production, the World Bank reckons, and this will ensure growth even in a low price environment. But the price mire — a yet deeper mire with returning Iranian barrels — is slowing Saudi growth.

Crude is crucial to both economies. But more so to Saudi Arabia than to Iran, which has survived three years of greatly constrained exports.

Senior Iranian oil official Mehdi Asali put it pithily early this week, commenting on the implications of the heightened tensions between the two governments. “While Iran uses oil for its development, Saudi Arabia finds its identity in oil.”

His remark may, in part, have been a snub to the House of Saud, suggesting that compared with the ancient and multifarious splendours of Persia, the Saudi kingdom is a recent and short-lived phenomenon. But there is some economic truth to it.

In 2014 — the last year for which figures are available — oil accounted for under 54pc of Iranian exports but 76pc of Saudi exports, according to Opec data. Of course, Iran’s percentage would be lower than in previous years because of sanctions. But going back to 2010, the proportion for Iran was 72pc, against 86pc for Saudi Arabia. And, in 2000-14, Saudi GDP grew by 300pc but, even with a couple of years of sanctions, Iran’s economic growth was only slightly less impressive.

And what does all this matter to the oil market? Well, it suggests that the balance of pain from continued low prices may be in favour of decision-makers in Tehran rather than those in Riyadh. The Iranian media has long trumpeted the victories of the so-called resistance economy. Now an economic upturn will begin to redress the severe falls in GDP brought by sanctions — and low prices. Some respite from the social and political dangers brought by the economic squeeze is in sight. And since the end of sanctions began to look like a certainty, oil officials and politicians have even insisted that the economy can cope with $30/bl if that is what it takes to ensure Iran reclaims its pre-sanctions market share.

If Tehran is looking to the sunny uplands of recovery of a sort, Riyadh is not. The belt tightening is just beginning for a population that has long lived off the fat of the barrel. Domestic fuel and water prices have been hiked and the budget cut. The security bill is soaring.

Come the June Opec meeting in Vienna, it is conceivable that it will be ashen-faced Saudis rather than Iranians contemplating the implications of continuing the market share strategy.

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