Following the quadrupling of oil prices in the last quarter of 1973, prices remained relatively stable from 1975 to 1978. During this period, Mohammad Reza Shah encouraged a high level of oil production and increased spending on imported goods and services and on military and economic aid to a small number of Iran's allies. Khomeini's government shifted the emphasis by decreeing a policy of oil conservation, with production reduced to a level sufficient to do no more than meet foreign exchange needs.

The efforts, initiated by the shah, to develop the petrochemical industry were thwarted by the Iran-Iraq War. The shah had begun a large petrochemical plant at Bandar Shahpur (now Bandar-e Khomeini) to produce fertilizers and sulfur; the plan was to expand production to include aromatics and olefins in a joint venture with Mitsui, a Japanese consortium. The plant, which cost US$3 billion, had almost been completed at the time of the Revolution. Iraqi planes bombed the still- unfinished plant in late 1986. Other petrochemical plants were completed soon after 1979, including the Khemco sulfur plant on Khark Island and a fertilizer plant at Marv Dasht near Shiraz.

The global recession of the early 1980s depressed the demand for oil. Iranian exports were also affected by the increased production by countries that were not members of the Organization of Petroleum Exporting Countries (OPEC). The resulting glut on the market caused a decline in Iranian oil revenues, which in turn lowered the value of the Iranian GNP. From September to October 1980, output fell from 1.3 million bpd to 450,000 bpd. Iran's petroleum production increased, however, to 2.4 million bpd in both 1982 and 1983, which enabled the government to end domestic rationing. However, production fell again in 1986 to 1.9 million bpd. OPEC prices for crude oil meanwhile fell from US$34 per barrel in 1982 to US$29 in March 1983. The government reduced oil exports in the early 1980s to promote a higher price per barrel and to foster conservation. Oil production fell as planned, although not as low as during 1980-81. By 1987 oil and gas exports produced only enough revenue to meet basic needs.

Oil revenues financed the import of weapons, food, medicine, and other critical goods and services by the mid-1980s. Whether or not the oil sector would be able to sustain losses as Iraq continued to target Iranian oil production and transportation facilities remained to be seen in late 1987. In addition to bombings of Iranian shuttle tankers, the Iranian oil industry was also troubled by fluctuating prices. Oil revenues decreased in 1985 and early 1986, remained steady in late 1986, and rose gradually in 1987. The government attempted to compensate for lost revenues in 1987 by further reductions in nonmilitary programs.

Oil and Gas Industry

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Source: U.S. Library of Congress