Iran Feeling the Pain of Plunging Oil Prices

Iran is the second largest Opec oil producer and already feeling the pain of declining prices more than any other in the Middle East.

Its "rainy day" oil stabilization fund, used to release profits when revenues decline, is reportedly badly depleted as a result of mismanagement by Mahmoud Ahmadinejad's government.

The precise figure is a state secret, but a member of parliament revealed recently it was $7bn - just enough to cover one year of imported petrol.

Ahmadinejad has seen two central bank governors resign and faces daily criticism of his policies. A strike by the powerful "bazaari" class over a new VAT tax - which would have aggravated inflation already at nearly 30% - was seen as a warning.

Iran is especially vulnerable because 80% of its revenue comes from oil. The IMF calculated recently that for Iran to balance its budget, the price of crude oil must not fall below $95 a barrel. With prices now below $50 the shortfall could be staggering.

The effect of declining oil prices will be felt both domestically and internationally. Ahmadinejad is expected to stand for a second presidential term next June but the lack of cash will restrict his plans to replace subsidies with direct cash payments - widely seen as a vote-buying tactic. US and UN sanctions imposed over the nuclear issue are already limiting Iran's ability to issue letters of credit and thus increasing its cost of trade.

Saudi Arabia has been happy to use high Opec production levels and low prices to contain Tehran's plans for regional hegemony. US experts and lobbyists now talk openly of exploiting the drop in oil prices to make the sanctions more effective.