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Mohammadi addresses the effect of oil prices on Iranian economy

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by Tamara Howard, Daily Vidette Staff Writer


International Seminar Series returned this week with Economics professor Hassan Mohammadi’s talk on “Oil Prices and the Iranian Economy.”

Many people are affected when oil prices increase on a day-to-day basis. ISU students driving home during breaks last year were directly affected by gas prices as high as three dollars and some may think that any change does not affect the Iranian economy drastically.

According to Mohammadi, any change in oil prices, whether the price increases or decreases, affects the Iranian economy severely.

“The Iran economy is very vulnerable to changes in world oil prices,” he said. “If oil prices increase, inflation increases as well as the price of living.”

The change in oil prices also affects foreign exchange earnings, gross domestic product, imports, real estate prices, public spending and revenue.

“When there is a change, it is not economical for Iran to send anything to the world market,” Mohammadi said. “No one will buy any goods.”

Iran is the second largest production country within the Organization of the Petroleum Exporting Countries, with 90 percent of revenues from exporting and 20 percent of its GDP from oil.

Historically, Iran received only 16 percent of annual oil profits and roughly $4,000 in today’s US dollar because most profits went to the British.

William D’Arcy approached the Iran government in 1900 to search for oil and minerals. From the discovery, a contract was agreed upon between the British and the Iranian government.

Money and politics are always close and Iran’s history showed that throughout the 19th century, including the rise and fall of six prime ministers and the century revolution, Iran began taking more control of it’s natural resource.

“At the core of the revolution, there was a distrust of western powers, especially Britain and the U.S.,” Mohammadi said. “It was not left or right, it was about the bourgeois or the merchants who financed the revolution to make it successful.”

Closer to 2009, Iran’s estimated income from 2007 exports was U.S. $76.5 billion with 85 percent coming from petroleum and natural gas. However, recent decreases in oil prices have worsened their economy.

“Standard of living and GDP is heavily dependent on [the] price of oil,” Mohammadi said. “Between 1975 and 2004, the per capita income was negative .03 percent. The standard of living went down rather than going up despite how rich the country is in natural resources.”

Economic experts apply economic impacts of rich-resource countries to two reasons that address how the discovery of natural resources traded globally affects the economy of that country. Those reasons include the “curse of natural resources” and Dutch disease.

Causes of the “curse” are attributed to multiple factors including high corruption in social, political and economic systems and large military spending. Dutch disease is more concerned with adverse effects of a boom in natural resource sectors on other sectors of the economy.

“Both the curse of natural resources and Dutch disease causes are prevalent in the Iran economy,” Mohammadi said. “You see oil increase at the same time the exchange rate does. There is also the evidence of the value of domestic currency increasing.”

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