Iran - The Economy the Iraq War

The iraq war

Iraq's attack on Iran in September 1980 provided the new Iranian government with an external scapegoat to divert attention from its own economic mismanagement. The war created economic dislocation, decreased industrial and petroleum development, and caused further deterioration of the agricultural sector, which had already suffered from the flight of landlords in 1979 and 1980.

Oil Exports

Iraq attacked Iranian ports, the oil terminal at Khark (then the main export teminal for crude oil, also cited as Kharg) Island and, beginning in 1984, tankers shuttling between Khark and Sirri islands in the Persian Gulf. The heavy damage to refineries and pipelines, factories, and industrial sites hurt oil production but did not significantly slow the export of oil until 1986; between 1982 and 1986, Iran produced 2.3 million barrels per day (bpd) on average. The combined effects of decreased oil production and falling oil prices, however, created an economic crisis and a shortage of foreign exchange by 1986. The destruction in 1980 of the important Abadan refinery (which produced an average of 628,000 bpd), the bombing of refineries and shuttle tankers, and the continued embargo on purchases of Iranian oil by Japan, the United States, and France contributed to the crisis. By November 1987, Iranian oil exports were estimated at 1 million bpd, down from an estimated 1.9 million bpd the previous month.

The Iraqi strategy of interrupting Iran's export supply line dated back to February 1984, when Iraq attacked tankers shuttling between Khark and Sirri islands. The terminal and cargo handling jetties on Khark Island were hit, reducing the island's export capacity from 6.5 million bpd to 2.5 million bpd within 3 months. This new tactic did not halt Iranian oil exports, but it did decrease them. As a consequence of lower export earnings, the new budgets showed deficits in fiscal years 1985 and 1986.

After the bombings of Khark Island, Iran developed Sirri Island as an alternate terminal. Operations began on Sirri Island in February 1985. Iraq attacked the refinery there on August 12, 1986, temporarily disrupting Iran's oil exports, and again in the fall of 1986, this time inflicting damage from which Iran took longer to recover.

As a consequence of the early 1984 bombings, insurance rates for tankers in the Gulf increased. The increase prompted Iran to extend special incentives to tankers to compensate for the risk involved. During the Iraqi attacks, Iran's main crude oil customer, Japan, banned its tankers from the Khark-Sirri shuttle. After Iran began giving preferential treatment to certain customers, Japan resumed its shipments in July 1984.

The August 1986 attacks on Sirri Island caused oil exports to fall to about one-third of their normal volume (from 1.6 million bpd to 600,000 bpd). An effort was made to develop Larak Island as a loading point, but monsoon winds temporarily closed Abu al Bukush, Larak Island's main oil terminal, in September 1986. Iraqi attacks on Larak Island's chief remaining oil export terminal in November and December 1986 further damaged it. By November 1987, Larak Island had recovered and had become Iran's main export point because of its distance from Iraq's air bases and because of its air defense system.

The oil export terminal at Lavan Island, which for years had exported 200,000 bpd, was also severely damaged in an attack in September 1986. The success of this attack made it clear that Iraq was gradually destroying Iran's export industry. By the end of 1986, the Iraqis had bombed Khark, Sirri, and Larak islands, as well as the shuttle tankers to Sirri and Larak; thirteen tankers had been damaged in missile attacks in August 1986 alone. The war also postponed the completion (projected for 1989) of a large petrochemical plant at Bandar-e Khomeini (formerly known as Bandar Shahpur, but renamed after the Revolution), an Iranian-Japanese venture.

War Costs

Half of Iran's revenue was spent on arms imports in the mid-1980s. In order to dedicate half its budget to military expenditures, Iran was forced to reduce such essential imports as food, for which it spent about US$4 billion annually from 1983 to 1987. Rationing of essentials such as meat, rice, and dairy products after the beginning of the war resulted in long lines at shops and an active black market. Sometimes the need occurred, as in the spring of 1987, to add nonfood consumer items to the rationing list. These austerity measures gave rise to the possibility of political instability.

Because of the war, trade had to be rerouted through the Soviet Union and Turkey, which increased transportation costs. The war also caused Iran to deplete its foreign reserves and to depend on foreign suppliers for needed goods. Military equipment accounted for about 25 percent of total imports by the mid-1980s, and the budget for FY 1987 showed that funds for the war exceeded financial allocations to all other economic sectors. The total cost of the war from its beginning in 1980 until early 1987 was more than US$240 billion (based on a total of US$200 billion by the end of 1984 and a cost of US$20 billion for each year thereafter). If lost oil revenues were taken into account, the cost of the war through 1987 would be even higher.

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