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Iran is simultaneously one of the most powerful and vulnerable economies in the world.
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It has immense and often unwelcome influence over its region,
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the largest energy reserves of any country on the planet,
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and a massive population that is remarkably well educated.
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On top of that, its position in the world could arguably not be more ideal.
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It strategically plays with a large coastline along some of the busiest trade routes on the
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planet and it's almost exactly at the centre point of the global population,
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making potential business with both established centres in Europe
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and rapidly developing markets in Asia a golden opportunity.
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This isn't a theoretical possibility either.
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Directly across the Persian Gulf, its neighbours Qatar, Bahrain, the UAE,
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Yaman and even Saudi Arabia are all enjoying the spoils of their fabulous oil wealth.
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And yes, they clearly have problems of their own,
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but with an average GDP per capita 10 times higher than Iran's,
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they at least have the wealth to pretend those problems don't exist.
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So yeah, the problem is that despite all of these advantages,
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Iran is also one of the most vulnerable countries in the world.
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Its economy is based heavily on oil and gas exports,
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which is bad for any country at the best of times because it creates dependency
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on a single volatile industry that is extremely easy to exploit.
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But of course, for Iran it's even worse because it's hard for them to even sell the oil that they do have.
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Iran's economy has almost become defined by the sanctions that it's lived under for the past 45 years.
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Trading directly with the country outside of very narrow exceptions
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is enough to get individuals, companies and even entire national economies
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blacklisted from global trade and finance.
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This endless tension of course came to a head a few weeks ago
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when the US conducted strikes on the nations believed nuclear facilities,
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something that was a not so subtle escalation from its conflict with Israel that a facto rival regional power.
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Now, this video is not about those strikes or speculation on what they may mean for the future.
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Nobody can predict it.
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In fact, this video was actually in production well before the US Air Force dug some holes in a mountainside somewhere.
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Realistically, these were just the latest events in a long history of adversary with the USA,
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which, for better or worse, still largely caused the shots when it comes to who gets to play in the global economy.
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So, with that, it's easy to conclude that Iran never really had a chance.
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However, it's made plenty of its own mistakes as well, which has put it into an extremely difficult position.
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It can't improve its economy without radically rethinking the way it operates,
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and its leaders can't change the way that it operates without potentially losing their failing grip on power.
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This is a real shame because the country has immense potential to not only massively improve the lives of its citizens,
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but also the rest of the world through energy, trade and regional stability
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in one of the most important crossroads on the planet.
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So, what is Iran's economic dilemma?
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Is there a reasonable path to reintegration in the global economy?
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And finally, beyond the headline-grabbing global issues,
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what are the challenges that domestic economy in Iran is facing?
00:02:35
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So, when it comes to Iran, it's important to first address the liquefied dinosaurs in the room.
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Iran is arguably the most energy abundant country on the planet.
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It has the third largest oil reserves behind Venezuela and Saudi Arabia,
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and the second largest natural gas reserves behind only Russia.
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Combined, this means it has almost endless fossil fuels, which are not only plentiful,
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but are very easy to extract compared to facilities in the North Sea,
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shale extraction or Arctic fields.
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Together with the fact that Iran is in such an ideal location to either pipe energy straight
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into China, or ship it through some of the most active routes in the world,
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this should be an easy way to effectively guarantee some level of economic prosperity.
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Yes, of course, there are major economic problems that come from an overdependence
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on oil exports, or any singular export for that matter.
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But Iran has so much of the stuff that it can effectively just brute force a pretty high level
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of output, and worry about how to distribute it later.
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The best way to do this would be to use those revenues as seed capital to try and develop
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alternative domestic industries, similar to what their neighbours on the other side of the
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Persian Gulf are doing to various levels of success.
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If that's too difficult, there is always the option of just investing the money in global
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markets and establishing a welfare system for people to enjoy a certain quality of life,
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regardless of what ends up happening with their energy reserves.
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But that hasn't happened.
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The country may have the greatest energy potentials on the planet,
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but as any disappointed parent will say, potentials aren't always lived up to.
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Putting aside the export challenges for a second,
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Iran has had a major problem just providing energy to itself.
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The country has almost limitless natural gas on tap and enough power plants to turn this
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into electricity, and yet it's been dealing with prolonged blackouts because its infrastructure
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is aging and is largely mishandled.
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Now partially this can be explained away by the fact that it's difficult for Iran to get
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modern electrical equipment due to how heavily they are sanctioned.
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Iran is a large country that gets extremely hot in summer and extremely cold in the winter,
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so there is a huge demand for energy just for domestic climate control.
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All of that transmission requires a lot of infrastructure that the country doesn't have
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the capacity to build itself, and since Western companies are forbidden from trading directly
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with Iran, they can't get it from the typical suppliers either.
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Now to be completely fair, that's actually not a situation unique to just Iran at the moment.
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A report from an organisation with a name that feels slightly targeted has shown that vital
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grid components are in short supply everywhere.
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The world is in the process of converting grids to accommodate renewable energies,
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which are now cheaper, but more sporadic.
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On the flip side, grids have also had new loads added to them from data centres,
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cryptocurrency mining, and now of course AI.
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The point is, the companies that make this infrastructure can't keep up with new demand,
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so there is very little incentive to even indirectly supply a sanctioned country like Iran
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when they can sell their products at a significant markup to customers who aren't going to get them
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into trouble.
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Now on top of this, it's not like Iran has tried too hard to fix this either.
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Realistically, they could probably work with China, who is now by far their largest trading
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partner to exchange their cheap fossil fuels for some of these tools.
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China's corporations still officially have to abide by sanctions if they want to do business
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with the West, but they have become very good at covering their tracks just enough that nobody
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really questions it.
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We will actually get to that whole system soon.
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The problem is that Iran doesn't necessarily want its abundant energy to become more accessible.
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One of the most direct ways that Iran uses its oil wealth to support its people is by directly
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subsidising oil and energy.
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This has led to a situation where energy to consumers is extremely cheap,
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even when accounting for the low incomes in the country.
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But when something is almost free, people don't value it as much, which means there
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has historically been few incentives to make energy usage more efficient.
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One of the biggest cottage industries to develop in Iran has been the previously mentioned
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cryptocurrency mining.
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Unofficial operators can use the country's highly subsidised energy to generate an asset
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that is useful for getting around the nation's sanctions.
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Officially, the government condemns this and points to it as the reason why people are
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experiencing blackouts, rather than other issues like general corruption and incompetence
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in managing the infrastructure that does exist.
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Usually, the relationship between economic output and energy usage is almost perfectly correlated.
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Wealthier economies both use more energy to fuel the industries which helps them get rich
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in the first place, and once they are rich, energy is used to provide transportation,
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climate control and high-end products.
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The correlation is almost striking, but even within this data, there are of course outlays.
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Countries up here use a lot of energy for not a lot of economic output, and down here,
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generate a lot of output without using that much energy.
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Iran uses more energy per capita than Denmark, but yet produces about a fifth of the output,
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even after accounting for purchasing power.
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It should also be noted that this graph adjusts for purchasing power with an arguably very
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generous estimate of Iran's true cost of living, thanks to their broken currency,
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and we'll also be getting to that.
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Put more simply, Iran is one of the least energy efficient economies on the planet.
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What this means is that Iran has a lot of energy that it can't really sell that easily,
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and it can't even use that effectively.
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Now of course, this goes beyond purely economics,
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but the whole energy shamosal also understandably raises some eyebrows over their supposed
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intentions to develop nuclear energy as a means of energy production.
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Realistically, they have all of the energy that they would ever need.
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Their problem is utilising it.
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Now even though chronic energy crises in the single most energy abundant country on earth
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is clearly very embarrassing, it's not the heart of the problem,
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more just a very obvious symptom.
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Making improvements to grid infrastructure would be possible,
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but since energy is so heavily subsidised anyway,
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there isn't a huge incentive to work around sanctions to make it even easier to get at.
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The same is true for things like oil refining.
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In the past, the country actually imported a lot of petroleum
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because it couldn't refine enough of the stuff itself.
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But when sanctions were heightened around 2010,
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it moved to develop its own refining capacity
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so that it could actually use its own reserves to power its own economy.
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Now these refineries were not great.
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Partially this was because getting the modern tools and components
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that goes into making these facilities was very difficult,
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and partially because a grift and graft that has become so endemic to the nation's organisations.
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They did produce gasoline though,
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enough to maintain the heavily subsidised supplies to their own people
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and actually start exporting to neighbouring states that Iran is friendly with.
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The problem was the gasoline coming out of these crude crude refineries
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was so bad that it was destroying car engines
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and causing major air quality problems around big cities.
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It was cheap though.
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As something of a Faustian bargain with its people,
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Iran has always tried to provide gasoline at a rate of $30,000 per litre,
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and in the past it even offered up to 150 litres per vehicle per month at half that price.
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Now on paper, that works out to be roughly $0.70 per litre
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or $2.65 per gallon and half of that for the first 150 litres,
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which is clearly a damn good deal.
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I'd make that deal.
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But it's not the whole story.
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That number is based on the official exchange rate,
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which is in turn based on not a whole lot.
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Thanks to sanctions, not much official private trade is done
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and inflation in Iran has been extremely high outside of the few things that are subsidised.
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People are so keen to get their hands on internationally recognised currencies
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that the actual exchange rate is about 20 times higher than the reported exchange rate.
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Now what that means is that the true price of gasoline within Iran
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is more like $0.05 per litre or $0.17 per gallon.
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This has created a thriving black market
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where people will smuggle this radically discounted fuel into neighbouring countries
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and sell it at a 2000% markup and still work out cheaper for the buyers than the official retailers.
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Put another way, potentially the most lucrative and effective oil business
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in the most energy rich country on earth
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is the people trucking the stuff over the border in 44 gallon drums.
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It would almost be comical if it wasn't so sad
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because behind all of this is millions of people
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who could easily be afforded a much better quality of life,
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but they aren't because the status quo is convenient.
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Obviously a pretty common theme throughout Iran's challenges has been sanctions,
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reducing those would obviously go a long way to improving the economy,
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but the problem is the economy is not a singular entity that gets to make its own decisions,
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it's a product of a lot of opposing incentives.
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The US wants to maintain control in the region
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and is highly opposed to the production of nuclear weapons
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that may be used against them or their allies.
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Now obviously there's been a long ongoing debate
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about the US being a global police force
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and whether they should have a say over what other countries get to do,
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but like it or not, for now, they do.
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Either way, Iran has consistently been one of the most sanctioned countries on the planet.
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Now for most countries that effectively means
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that they can't do business with Iran either,
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even if they don't individually want to get involved in the whole situation.
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Businesses doing business with Iranian organisations
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can be cut off from operating in the US,
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they can also be cut off from US banks or insurance agencies
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as well as the US centred swift international transfer system.
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Naturally the USA is just a more valuable commercial centre to work with over Iran,
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but even companies or countries that don't do business with the USA
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still need to comply because they might want to do business
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with a business that does do business with the USA.
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And global know your customer laws means
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that even several degrees of separation can cause problems.
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The first group of this is convenient for are the organisations
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that are happy to circumvent these rules
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to smuggle Iranian oil out of the country
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and smuggle other goods back in with a major markup each way.
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Now Iran itself is also not without friends.
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It was one of the founding members of OPEC,
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an organisation that could push back against US influence in a big way
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if it really wanted to.
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Collectively OPEC controls about 60% of internationally traded oil
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which has been great for making sure that oil prices remain favourable,
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but it also means that it could theoretically say
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leave Iran alone or else we will turn off the oil
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and most countries would have to comply.
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Now of course they haven't done that
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because while these countries do all technically cooperate with one another
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they only do that to control oil supply,
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not to achieve other geopolitical goals.
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Or at least that's the official line.
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Even if that were the case,
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a lot of members within OPEC are otherwise just as hostile
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if not more hostile towards Iran than the USA is.
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And finally the whole OPEC system works by each individual member
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sacrificing a little bit of their productive potential to keep supply limited.
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If Iran is not allowed to sell its oil anyway,
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that just makes the whole thing easier for every other nation
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because then they get to sell more than they would have otherwise been able to
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with another member supplying global oil demand.
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The status quo is also convenient for countries like China
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who are the greatest beneficiaries of cheap black market energy being supplied by Iran.
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Without those sanctions they would have to pay the significantly higher market prices
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for a lot of their energy needs.
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But on top of all of this,
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the status quo is convenient for the nation's leadership.
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Concessions to the west would be seen as weakness from
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fundamentalist groups within the nation
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and concessions to their own people are seen as a slippery slope.
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Iran's heavily subsidized oil and energy for example
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are clearly not working as intended.
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They've just been exploited by people arbitraging
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the unsustainable discounts to make money.
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However when they tried to repeal these discounts
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the country saw some of its most intense civil unrest
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since the revolution that overthrew the last regime.
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Now we actually already made an entire video a few years ago
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on why Iran isn't highly motivated
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to give their people economic freedoms and opportunities.
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So as always we don't want to repeat too much here
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but while the status quo might be convenient for all of the parties with power
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even if it does come at the expense of the people
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it is a status quo that's not going to be sustainable long term.
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Unemployment is high, inflation is high,
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brain drain has been a chronic issue for over 50 years
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and on top of that Iran actually has a very rapidly aging population.
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Young productive workers are leaving whenever they can
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leaving behind older people for the state to support
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and despite their strictly enforced cultural values
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one thing that hasn't translated to is birth rates.
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Iran has one of the lowest birth rates of any low-income country in the world
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which means all the problems are only going to get worse
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as the population gets progressively less productive.
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Realistically making structural and lasting improvements
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would require walking back a lot of the systems
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that people have come to rely on
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which in a country that is already in such a vulnerable position
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is not something that leadership is going to be willing to do.
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That leadership which is largely very old themselves
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is also structured in a way that is fundamentally resistant to change
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not just because of their very traditional values
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but also because that leadership is a very strange blend of private industry
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ethiocracy and governance all rolled into one.
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Now this is more politics and economics
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but we have made an entire video on Iran's political hierarchy
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over on our second channel Context Matters
00:14:57
which you should be able to click to on your screen now.
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Thanks for watching mate, bye.
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