Will Iran become the next Venezuela?

 Truck drivers from the Zarandiyeh steel mill striking. ( Photo: Twitter )

Truck drivers from the Zarandiyeh steel mill striking. (Photo: Twitter)

Iran faces runaway inflation, a trucker strike, and oil sanctions

Iran’s truckers are on strike for the second time this year, the Middle East Monitor reported yesterday, protesting inflationary insurance prices, permit fees, high commission rates, spare parts costs, and increasing operational costs. Iranian oil truck drivers had previously struck in May, but long lines are again forming at fuel stations across the country as the second strike takes hold. The first strike was concentrated in the Qazvin, Lorestan, East Azerbaijan, and Mazandaran provinces in the northwestern part of the country. The current strike has spread to more than 100 cities

In Iran, truckers’ wages are determined by haulage fees set by the government. During the first strike in May-June, truck drivers demanded increases between 35 and 50%, while Tehran agreed to a 20% increase. The problem comes from runaway inflation: Iran’s rial hit a record low against the dollar earlier this week, and posted an annual inflation rate of 293%. The country’s currency is rapidly losing value, but truck drivers’ wages are fixed by the government. 

In widespread trucker strikes, such as we saw earlier this year in Brazil, one of the first commodities to experience shortages is retail gasoline or petrol. The trucks stop rolling, and tanker trucks stop refilling gas stations, but personal vehicles keep moving, burning fuel that isn’t being replenished. Once petrol shortages become widespread, the larger population can no longer move, and the entire economy grinds to a halt. Even so, the trucker strike may be the least of Iran’s problems at the moment.

“It is impossible to predict how low the Iranian currency will go,” Johns Hopkins economist Steve Hanke told Voice of America. “We just know it is dying. And when currencies die, inflation goes up, the economy tends to be completely destabilized, and society in general becomes destabilized because [people] can’t trust their own money.”

Yesterday, Bloomberg reported that India will no longer buy Iranian oil beginning in November. India is Iran’s second-largest customer, having imported an average of 557K bpd this year. South Korea and Japan have also said they would halt or reduce Iranian imports; China, Iran’s biggest customer, has not yet laid out its plans.

Runaway inflation combined with dwindling government oil revenues could spell disaster for Iran, similar to what’s happened in Venezuela. That fellow OPEC member also saw massive currency depreciation, which eventually led to food shortages and a near-total shutdown of the country’s ability to finance oil production. There’s widespread speculation that ConocoPhillips (NYSE: COP), which won a $2B judgment against PDVSA, the Venezuelan state oil company, may take the opportunity to seize offshore PDVSA assets to make itself whole. 

If Iran goes the way of Venezuela and loses its ability to finance its petroleum industry, expect widespread misery in the country, a surge in economic refugees, potential regional instability, and unpredictable volatility for oil markets. In 2017, Iran exported about 2.1M bpd of crude oil, about 2% of the global supply. If that number goes to zero, as it (almost) has in Venezuela, the price of oil will spike worldwide, potentially to levels that will destroy demand.