Petroleum is the engine that drives the Iranian economy
Courtesy United Nations (E. Adams)

Petroleum has been the main industry in Iran since the 1920s. Iran was the world's fourth largest prodÍÍÍucer of crude oil and the second largest exporter of petroleum at the peak of its oil industry in the mid-1970s. The war with Iraq cut Iran's production in the 1980s, although Iranian oil reserves remained the fourth largest in the world.

Nationalization of the oil industry in 1951 resulted in temporary political and financial chaos. Production did not resume until late 1954 (see Mossadeq and Oil Nationalization , ch. 1). As part of the nationalization process, the government formed the National Iranian Oil Company (NIOC). As owner, the government directed NIOC policy. As a result of the Consortium Agreement reached in 1954 between the government and a consortium of foreign oil companies, industry control of the oil companies was left virtually intact, but the agreement greatly increased the government's share of income from each barrel of oil produced. The combination of the larger share of income and rising oil production provided the government with increased revenues with which to finance industrial development. In addition, slow but steady progress was made in reestablishing Iran's relations with Western powers in the aftermath of nationalization. The resolution of the oil crisis in 1954 (nationalization of oil and the signing of the Consortium Agreement) led to a policy of increased economic and political cooperation between Iran and states outside the Soviet sphere of influence. In 1961 Iran joined with other major oil-exporting countries to form OPEC, whose members acted in concert to increase each country's control over its own production and to maximize its revenues.

When Iran's economy worsened after the outbreak of war with Iraq, its willingness to abide by OPEC guidelines decreased. From 1983 to 1984, OPEC priced oil at US$29 per barrel, but Iran undercut OPEC prices at US$28 per barrel through October 1984 and subsequently reduced it even further to US$26.50 per barrel. Iran continued deliberate undercutting until the pricing crisis in July 1986, when prices dropped below US$10 per barrel and the oil-exporting countries met to reach agreement on both price and production levels. The thirteen members of OPEC, and several non-OPEC countries, agreed in December 1986 to a price of US$18 per barrel, with a maximum differential of US$2.65 between light and heavy crude oil. (Light crude is the source of products such as gasoline and is more expensive, whereas heavy crude provides the components used in products such as residual fuel, oil coke, and waxes.) By January 1987, as a result of war damage and government conservation policies, crude production averaged 2.2 million bpd, about 100,000 bpd below Iran's OPEC quota.

Data as of December 1987