Iran Election Turmoil Bad News for Oil Sector

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". . .vital oil sector likely to witness a stasis it can ill afford amid faltering production and investments."

Political uncertainty and unrest in the wake of Iran's disputed presidential elections are casting a deeper pall on the country's prospects of a near-term economic recovery, with the vital oil sector likely to witness a stasis it can ill afford amid faltering production and investments.

Under the best of circumstances, President Mahmoud Ahmadinejad may have been able to seize upon President Barack Obama's overtures to Iran and gradually bring about an end to the U.S.-led international isolation the country's oil sector has endured.

But the mass protests and cries of foul by opposition rival Mir Hossein Mousavi and his followers over alleged election fraud could prove to be a further impediment to bringing in foreign oil firms, many of whom have avoided Iran because of U.S. sanctions and Western concerns about the country's disputed nuclear program.

"Seeing how the aftermath of the elections have played out—with this deep cleft with the ruling elite being quite exposed now, it's quite hard to see Ahmadinejad even being on the winning side after meeting protests with violence," said Samuel Ciszuk, Middle East energy analyst with London-based HIS.

The hard-line government will likely "have to deal more with domestic issues for the rest of the year, at least, with a clear focus on solving the domestic situation." It's a delay Iran cannot afford.

The country has grappled with inflation still near 25% even as other major oil producers in the region have seen inflation rates drop sharply. Unemployment remains high at almost 20%, and the collapse of oil prices in the second half of last year threatened to sharply erode the Tehran government's ability to sustain the subsidy program it uses to curry favor with its supporters.

Compounding these problems is Iran's continuing battle with declining oil output—an annual fall of between 4% and 8%, or roughly 200,000 to 350,000 barrels per day, according to analysts. Iran's per-barrel production costs are $90—one of the highest among the Organization of the Petroleum Exporting Countries member states.

"The Iranians are going to be very much inward focused for a while, and that begs the question of how they're going to attract the level of investment they need," said Raja Kiwan, a Dubai-based analyst with consultancy PFC Energy.

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