Oil Report

UPDATE 1-Iran budget to be based on oil price of $37.5-report

(Adds MP comments on revenue drop, paragraphs 8-10)

TEHRAN, Jan 4 (Reuters) - Iran’s 2009-10 budget is expected to be based on an oil price of $37.5 per barrel, a “logical” level in view of last year’s price fall, Oil Minister Gholamhossein Nozari was quoted as saying on Sunday.

An Iranian newspaper last month said the government and a parliament committee had an initial agreement to base the budget starting in March on an oil price of $45, lower than previously suggested.

“The price of oil in next year’s budget has been envisaged at $37.5 (per barrel) which seems to be a logical price considering the drop in prices,” Nozari was quoted as saying by the semi-official Mehr News Agency.

The Islamic Republic of Iran Broadcasting (IRIB) website carried a similar report, saying the government and parliament had agreed on this price for the budget, which has yet to be presented to the legislature.

Oil prices have plunged by some $100 per barrel since mid-July to around $46, pulled down by a slowing world economy.

Some 80 percent of the foreign exchange earnings of Iran, the world’s fourth-largest oil producer, come from crude sales.

Economists say Iran’s government, which has enjoyed windfall oil earnings in recent years, would likely have to cut spending in 2009 when President Mahmoud Ahmadinejad is expected to run for re-election, unless crude prices rebound to $80 or so.

The head of parliament’s economic commission Gholam-Reza Mesbahi said the lower oil price was expected to cause a 33 percent drop in government revenue in the next budget, the Jahan-e Eghtesad business daily reported.

“In view of the drop in income from crude oil exports one of the necessities of the budget would be for it to be contractionary,” Mesbahi was quoted as saying.

He said raising taxes would not be possible and that borrowing from the Iranian banking system would fuel inflation. Financial sanctions imposed on Iran over its disputed nuclear plans hindered borrowing from foreign banks, he said.

A government official said in October Iran was planning for an oil price of $55 to $60 in the next budget, but oil prices have continued to slide since then.

The oil price set for Iran’s budget indicates government expectations but does not give a full picture.

Economists said last year’s budget was officially based on a price of about $40 a barrel but, when withdrawals from an oil revenue reserve fund and other crude-related earnings were taken into account, the state needed $70 or more to balance its books.

The government has been seeking to reduce subsidies, a heavy drain on state coffers, including discussing utility bill hikes. (Reporting by Hashem Kalantari; Writing by Fredrik Dahl; Editing by Sharon Lindores)