Iran's Oil Woes Threaten the Mullahs

Should this plan go through, it could cause much pain to Iran's population. The subsidy replacement plan, which involves paying the subsidy money directly into families' bank accounts -- instead of government paying the subsidy amount directly to the electricity company -- is not expected to maintain its value in accordance with high inflation levels. This will mean that if inflation levels stay the same until next year, the value of the subsidy received in cash will be 27% less than last year. With falling oil prices, it is very likely that the government will have to go through with this plan. This will lead to serious damage to Ahmadinejad's popularity. It will also antagonize Iran's population. The revolution has not brought them edalat (justice). Now high oil prices, their only hope for better economic welfare, are failing them too.

Despite the rising unpopularity at home, what worries Iran's leadership even more is that, as history has shown them, lowering oil prices could mean having to be flexible with the West. This was first shown in the mid 1980s, when Iran was fighting Iraq. Midway through the war, many countries were calling for a ceasefire, but Khomeini didn't listen. He was confident that his forces could go on fighting and topple Saddam. In order to finance this ambition, Tehran attacked oil tankers in the Persian Gulf, with the hope of pushing oil prices up. This didn't work. By 1988, the falling oil price finally forced Ayatollah Khomeini to take the painful decision of accepting a ceasefire with Saddam Hussein, something which he likened to "drinking a chalice of poison."

The same happened in 1997. The Asian crisis of that year, which led to a crash in oil prices to less than $10 per barrel, was one of the major motivators behind Iran's rapprochement with the West, headed by the reformist administration of Ayatollah Khatami. Low oil prices were again a factor behind Iran's Western-friendly policy of temporarily suspending uranium enrichment in 2005. In fact one of the reasons Iran felt confident enough to stop the suspension was that oil prices started increasing sharply in August that year.

What this all could mean is that if oil prices fall to $70 per barrel or below, Ahmadinejad may find it difficult to maintain the same level of belligerence against the West. Things could get much worse for him if Obama is elected. His pledge to invest $150 billion in renewable energy could very well burst more bubbles around oil prices, thus pulling them to more unbearable lows for right-wingers in Iran -- so low that the words "suspension of uranium enrichment" may turn from blasphemy into a realistic option.