Iran's Economic Dilemma

0:00 Iran is simultaneously one of the most

0:02 powerful and vulnerable economies in the world.

0:04 It has immense and often unwelcome influence over its region,

0:07 the largest energy reserves of any country on the planet,

0:09 and a massive population that is remarkably well educated.

0:12 On top of that, its position in the world could arguably not be more ideal.

0:16 It strategically plays with a large coastline

0:18 along some of the busiest trade routes on the planet and it's almost exactly

0:21 at the centre point of the global population,

0:23 making potential business with both established centres in Europe

0:26 and rapidly developing markets in Asia a golden opportunity.

0:29 This isn't a theoretical possibility either.

0:32 Directly across the Persian Gulf, its neighbours Qatar, Bahrain, the UAE,

0:35 Yaman and even Saudi Arabia are all

0:37 enjoying the spoils of their fabulous oil wealth.

0:40 And yes, they clearly have problems of their own,

0:42 but with an average GDP per capita 10 times higher than Iran's,

0:45 they at least have the wealth to pretend those problems don't exist.

0:48 So yeah, the problem is that despite all of these advantages,

0:51 Iran is also one of the most vulnerable countries in the world.

0:55 Its economy is based heavily on oil and gas exports,

0:57 which is bad for any country at the best of times because it

1:00 creates dependency on a single volatile

1:02 industry that is extremely easy to exploit.

1:04 But of course, for Iran it's even worse because it's hard

1:07 for them to even sell the oil that they do have.

1:09 Iran's economy has almost become defined by the sanctions

1:12 that it's lived under for the past 45 years.

1:14 Trading directly with the country outside of very

1:17 narrow exceptions is enough to get individuals,

1:19 companies and even entire national economies

1:20 blacklisted from global trade and finance.

1:23 This endless tension of course came to a head a few weeks

1:25 ago when the US conducted strikes on the nations believed nuclear facilities,

1:28 something that was a not so subtle escalation from its

1:31 conflict with Israel that a facto rival regional power.

1:34 Now, this video is not about those strikes

1:36 or speculation on what they may mean for the future.

1:39 Nobody can predict it.

1:40 In fact, this video was actually in production well before

1:42 the US Air Force dug some holes in a mountainside somewhere.

1:45 Realistically, these were just the latest events

1:47 in a long history of adversary with the USA, which, for better or worse,

1:50 still largely caused the shots when it comes

1:52 to who gets to play in the global economy.

1:54 So, with that, it's easy to conclude that Iran never really had a chance.

1:58 However, it's made plenty of its own mistakes as well,

2:01 which has put it into an extremely difficult position.

2:04 It can't improve its economy without radically rethinking the way it operates,

2:07 and its leaders can't change the way that it

2:09 operates without potentially losing their failing grip on power.

2:12 This is a real shame because the country has immense

2:14 potential to not only massively improve the lives of its citizens,

2:17 but also the rest of the world through energy,

2:20 trade and regional stability in one

2:21 of the most important crossroads on the planet.

2:23 So, what is Iran's economic dilemma?

2:26 Is there a reasonable path to reintegration in the global economy?

2:29 And finally, beyond the headline-grabbing global issues,

2:31 what are the challenges that domestic economy in Iran is facing?

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3:24 So, when it comes to Iran,

3:25 it's important to first address the liquefied dinosaurs in the room.

3:28 Iran is arguably the most energy abundant country on the planet.

3:31 It has the third largest oil reserves behind Venezuela and Saudi Arabia,

3:35 and the second largest natural gas reserves behind only Russia.

3:38 Combined, this means it has almost endless fossil fuels,

3:40 which are not only plentiful,

3:42 but are very easy to extract compared to facilities in the North Sea,

3:45 shale extraction or Arctic fields.

3:47 Together with the fact that Iran is in such

3:49 an ideal location to either pipe energy straight into China,

3:51 or ship it through some of the most active routes in the world,

3:53 this should be an easy way

3:55 to effectively guarantee some level of economic prosperity.

3:58 Yes, of course, there are major economic problems

4:00 that come from an overdependence on oil exports,

4:02 or any singular export for that matter.

4:04 But Iran has so much of the stuff that it

4:06 can effectively just brute force a pretty high level of output,

4:09 and worry about how to distribute it later.

4:11 The best way to do this would be to use those revenues as seed capital

4:13 to try and develop alternative domestic industries,

4:15 similar to what their neighbours on the other side

4:17 of the Persian Gulf are doing to various levels of success.

4:20 If that's too difficult,

4:21 there is always the option of just investing the money in global markets

4:24 and establishing a welfare system for people to enjoy a certain quality of life,

4:28 regardless of what ends up happening with their energy reserves.

4:31 But that hasn't happened.

4:32 The country may have the greatest energy potentials on the planet,

4:35 but as any disappointed parent will say, potentials aren't always lived up to.

4:39 Putting aside the export challenges for a second,

4:42 Iran has had a major problem just providing energy to itself.

4:46 The country has almost limitless natural gas on tap

4:48 and enough power plants to turn this into electricity,

4:50 and yet it's been dealing with prolonged blackouts

4:52 because its infrastructure is aging and is largely mishandled.

4:56 Now partially this can be explained away by the fact that it's difficult

4:58 for Iran to get modern electrical equipment

5:00 due to how heavily they are sanctioned.

5:02 Iran is a large country that gets extremely

5:04 hot in summer and extremely cold in the winter,

5:06 so there is a huge demand for energy just for domestic climate control.

5:10 All of that transmission requires a lot of infrastructure

5:12 that the country doesn't have the capacity to build itself,

5:14 and since Western companies are forbidden from trading directly with Iran,

5:17 they can't get it from the typical suppliers either.

5:20 Now to be completely fair,

5:21 that's actually not a situation unique to just Iran at the moment.

5:24 A report from an organisation with a name that feels slightly

5:27 targeted has shown that vital grid components are in short supply everywhere.

5:31 The world is in the process

5:32 of converting grids to accommodate renewable energies,

5:34 which are now cheaper, but more sporadic.

5:37 On the flip side, grids have also had new loads added to them from data centres,

5:40 cryptocurrency mining, and now of course AI.

5:43 The point is, the companies that make

5:44 this infrastructure can't keep up with new demand,

5:46 so there is very little incentive to even

5:49 indirectly supply a sanctioned country like Iran when they

5:51 can sell their products at a significant markup

5:53 to customers who aren't going to get them into trouble.

5:55 Now on top of this, it's not like Iran has tried too hard to fix this either.

6:00 Realistically, they could probably work with China,

6:02 who is now by far their largest trading partner

6:04 to exchange their cheap fossil fuels for some of these tools.

6:07 China's corporations still officially have to abide by sanctions

6:10 if they want to do business with the West,

6:12 but they have become very good at covering

6:14 their tracks just enough that nobody really questions it.

6:16 We will actually get to that whole system soon.

6:19 The problem is that Iran doesn't necessarily

6:21 want its abundant energy to become more accessible.

6:23 One of the most direct ways that Iran uses its oil

6:25 wealth to support its people is by directly subsidising oil and energy.

6:29 This has led to a situation where energy to consumers is extremely cheap,

6:33 even when accounting for the low incomes in the country.

6:35 But when something is almost free, people don't value it as much,

6:38 which means there has historically been few

6:40 incentives to make energy usage more efficient.

6:43 One of the biggest cottage industries to develop

6:44 in Iran has been the previously mentioned cryptocurrency mining.

6:48 Unofficial operators can use the country's highly subsidised energy to generate

6:51 an asset that is useful for getting around the nation's sanctions.

6:54 Officially, the government condemns this and points to it

6:57 as the reason why people are experiencing blackouts,

6:59 rather than other issues like general corruption

7:01 and incompetence in managing the infrastructure that does exist.

7:04 Usually, the relationship between economic output

7:06 and energy usage is almost perfectly correlated.

7:09 Wealthier economies both use more energy to fuel the industries

7:11 which helps them get rich in the first place, and once they are rich,

7:15 energy is used to provide transportation, climate control and high-end products.

7:19 The correlation is almost striking,

7:20 but even within this data, there are of course outlays.

7:24 Countries up here use a lot of energy for not a lot of economic output,

7:27 and down here, generate a lot of output without using that much energy.

7:30 Iran uses more energy per capita than Denmark,

7:33 but yet produces about a fifth of the output,

7:35 even after accounting for purchasing power.

7:37 It should also be noted that this graph adjusts for purchasing power

7:40 with an arguably very generous estimate of Iran's true cost of living,

7:43 thanks to their broken currency, and we'll also be getting to that.

7:47 Put more simply, Iran is one

7:48 of the least energy efficient economies on the planet.

7:51 What this means is that Iran has a lot

7:53 of energy that it can't really sell that easily,

7:55 and it can't even use that effectively.

7:57 Now of course, this goes beyond purely economics,

8:00 but the whole energy shamosal also understandably raises some eyebrows over

8:04 their supposed intentions to develop nuclear

8:06 energy as a means of energy production.

8:08 Realistically, they have all of the energy that they would ever need.

8:11 Their problem is utilising it.

8:13 Now even though chronic energy crises in the single

8:16 most energy abundant country on earth is clearly very embarrassing,

8:18 it's not the heart of the problem, more just a very obvious symptom.

8:22 Making improvements to grid infrastructure would be possible,

8:25 but since energy is so heavily subsidised anyway,

8:28 there isn't a huge incentive to work around

8:30 sanctions to make it even easier to get at.

8:32 The same is true for things like oil refining.

8:35 In the past, the country actually imported a lot

8:37 of petroleum because it couldn't refine enough of the stuff itself.

8:40 But when sanctions were heightened around 2010,

8:42 it moved to develop its own refining capacity so that it

8:45 could actually use its own reserves to power its own economy.

8:48 Now these refineries were not great.

8:51 Partially this was because getting the modern tools and components

8:53 that goes into making these facilities was very difficult,

8:56 and partially because a grift and graft

8:58 that has become so endemic to the nation's organisations.

9:00 They did produce gasoline though,

9:02 enough to maintain the heavily subsidised supplies to their own people

9:05 and actually start exporting to neighbouring states that Iran is friendly with.

9:09 The problem was the gasoline coming out

9:10 of these crude crude refineries was so bad

9:12 that it was destroying car engines and causing

9:14 major air quality problems around big cities.

9:17 It was cheap though.

9:19 As something of a Faustian bargain with its people,

9:21 Iran has always tried to provide gasoline at a rate of $30,000 per litre,

9:25 and in the past it even offered up to 150

9:28 litres per vehicle per month at half that price.

9:30 Now on paper, that works out to be roughly $0.70 per litre

9:33 or $2.65 per gallon and half of that for the first 150 litres,

9:38 which is clearly a damn good deal.

9:39 I'd make that deal.

9:41 But it's not the whole story.

9:42 That number is based on the official exchange rate,

9:45 which is in turn based on not a whole lot.

9:47 Thanks to sanctions,

9:48 not much official private trade is done and inflation in Iran

9:51 has been extremely high outside of the few things that are subsidised.

9:55 People are so keen to get their hands on internationally recognised currencies

9:58 that the actual exchange rate is about

10:01 20 times higher than the reported exchange rate.

10:03 Now what that means is that the true price of gasoline

10:06 within Iran is more like $0.05 per litre or $0.17 per gallon.

10:11 This has created a thriving black market where people

10:13 will smuggle this radically discounted fuel into neighbouring countries

10:16 and sell it at a 2000% markup and still

10:19 work out cheaper for the buyers than the official retailers.

10:22 Put another way, potentially the most lucrative

10:24 and effective oil business in the most energy rich

10:26 country on earth is the people trucking

10:28 the stuff over the border in 44 gallon drums.

10:30 It would almost be comical if it wasn't so sad because behind all of this is

10:34 millions of people who could easily be afforded a much better quality of life,

10:38 but they aren't because the status quo is convenient.

10:42 Obviously a pretty common theme throughout Iran's challenges has been sanctions,

10:46 reducing those would obviously go a long way to improving the economy,

10:49 but the problem is the economy is not

10:51 a singular entity that gets to make its own decisions,

10:53 it's a product of a lot of opposing incentives.

10:56 The US wants to maintain control in the region and is highly opposed

10:59 to the production of nuclear weapons that may

11:01 be used against them or their allies.

11:03 Now obviously there's been a long ongoing

11:05 debate about the US being a global police

11:07 force and whether they should have a say over what other countries get to do,

11:10 but like it or not, for now, they do.

11:13 Either way, Iran has consistently been one

11:15 of the most sanctioned countries on the planet.

11:17 Now for most countries that effectively means

11:19 that they can't do business with Iran either,

11:21 even if they don't individually want to get involved in the whole situation.

11:25 Businesses doing business with Iranian organisations can

11:27 be cut off from operating in the US,

11:29 they can also be cut off from US banks or insurance

11:31 agencies as well as the US centred swift international transfer system.

11:35 Naturally the USA is just a more

11:37 valuable commercial centre to work with over Iran,

11:39 but even companies or countries that don't do

11:41 business with the USA still need to comply

11:43 because they might want to do business

11:44 with a business that does do business with the USA.

11:47 And global know your customer laws means

11:48 that even several degrees of separation can cause problems.

11:52 The first group of this is convenient for are

11:54 the organisations that are happy to circumvent these rules

11:56 to smuggle Iranian oil out of the country and smuggle

11:58 other goods back in with a major markup each way.

12:01 Now Iran itself is also not without friends.

12:04 It was one of the founding members of OPEC,

12:05 an organisation that could push back against US influence

12:08 in a big way if it really wanted to.

12:10 Collectively OPEC controls about 60% of internationally traded oil which

12:14 has been great for making sure that oil prices remain favourable,

12:16 but it also means that it could theoretically say leave Iran alone or else

12:20 we will turn off the oil and most countries would have to comply.

12:23 Now of course they haven't done that because while these countries do all

12:27 technically cooperate with one another they only do that to control oil supply,

12:30 not to achieve other geopolitical goals.

12:33 Or at least that's the official line.

12:35 Even if that were the case,

12:36 a lot of members within OPEC are otherwise just as hostile

12:39 if not more hostile towards Iran than the USA is.

12:42 And finally the whole OPEC system works by each individual member

12:45 sacrificing a little bit of their productive potential to keep supply limited.

12:49 If Iran is not allowed to sell its oil anyway,

12:51 that just makes the whole thing easier for every

12:53 other nation because then they get to sell

12:55 more than they would have otherwise been able

12:56 to with another member supplying global oil demand.

12:59 The status quo is also convenient for countries like China who are

13:02 the greatest beneficiaries of cheap black market energy being supplied by Iran.

13:06 Without those sanctions they would have to pay the significantly

13:08 higher market prices for a lot of their energy needs.

13:11 But on top of all of this, the status

13:12 quo is convenient for the nation's leadership.

13:15 Concessions to the west would be

13:16 seen as weakness from fundamentalist groups within

13:18 the nation and concessions to their own people are seen as a slippery slope.

13:22 Iran's heavily subsidized oil and energy

13:24 for example are clearly not working as intended.

13:26 They've just been exploited by people

13:28 arbitraging the unsustainable discounts to make money.

13:31 However when they tried to repeal these discounts the country saw some

13:34 of its most intense civil unrest since

13:35 the revolution that overthrew the last regime.

13:38 Now we actually already made an entire video a few years ago

13:40 on why Iran isn't highly motivated

13:42 to give their people economic freedoms and opportunities.

13:44 So as always we don't want to repeat too much here

13:47 but while the status quo might be convenient for all of the parties

13:50 with power even if it does come at the expense of the people

13:53 it is a status quo that's not going to be sustainable long term.

13:56 Unemployment is high, inflation is high,

13:58 brain drain has been a chronic issue for over 50 years

14:01 and on top of that Iran actually has a very rapidly aging population.

14:05 Young productive workers are leaving whenever they can

14:07 leaving behind older people for the state to support

14:10 and despite their strictly enforced cultural values one

14:13 thing that hasn't translated to is birth rates.

14:15 Iran has one of the lowest birth rates

14:17 of any low-income country in the world which

14:19 means all the problems are only going to get

14:21 worse as the population gets progressively less productive.

14:24 Realistically making structural and lasting improvements

14:27 would require walking back a lot

14:28 of the systems that people have come to rely on which

14:30 in a country that is already in such a vulnerable position

14:33 is not something that leadership is going to be willing to do.

14:36 That leadership which is largely very old themselves is also structured

14:39 in a way that is fundamentally resistant to change not just because

14:43 of their very traditional values but also because that leadership is a very

14:47 strange blend of private industry ethiocracy and governance all rolled into one.

14:51 Now this is more politics and economics but we

14:53 have made an entire video on Iran's political hierarchy

14:56 over on our second channel Context Matters which you

14:58 should be able to click to on your screen now.

14:59 Thanks for watching mate, bye.