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| World Marketplace |
Running on Empty
Lionel Beehner
06/01/2007
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The trouble with this surge in gas consumption is twofold.
First, Iranian production cannot keep pace with demand, resulting in drastic
cuts in energy exports to meet its growing domestic needs. Iran’s imports of oil
now surpass its exports. The country has consistently failed to meet its export
quotas set by OPEC. Second, bulging population leads to greater demand. A
population of 68 million increases by 500,000 annually, which contributes to the
country’s imminent energy crunch. In recent years, the government has dipped
into its rainy-day stabilization fund—despite higher-than-average global oil
prices—to pay for its generous gas subsidies. According to Stern, last year
Tehran even dipped into its foreign exchange reserves for the first time to
offset diminishing profits from its oil exports.
Iran’s ruling mullahs have shown little willingness to reinvest in dilapidated oil and gas fields. |
Iran’s energy prospects look so grim that the government has
even rolled out an unpopular new rationing plan for consumers to curb their
gasoline intake. The aim of this austerity measure is to stabilize domestic
prices, while reducing consumption of gasoline and diesel products. The country
shelved an earlier push to ration gasoline last summer amid fears of a public
backlash.
Yet the rationing scheme may be a tough pill to swallow for
Iranians already struggling with double-digit inflation and unemployment. Little
of Iran’s $50 billion in annual oil revenues ever trickles down to the masses.
Moreover, according to Iran’s Karafarin Bank, the cost of housing is up 14
percent, medical care is up 18 percent and food prices are up 33 percent.
Officially, unemployment hovers at 12 percent, but some economists say it may be
as high as 25 percent. The World Bank calculates that given Iran’s growing labor
force and demographic strains, the economy will need to produce 700,000 new jobs
annually to absorb these fresh entrants into the labor force. Per capita income
levels are 25 percent lower than those under the shah in the 1970s.
Ahead of Iran’s fiscal year, which began in March, the government’s
budget provided for a lowball estimate of oil prices at below $30 a
barrel, versus the actual price of roughly $50. |
President Mahmoud Ahmadinejad has repeatedly called on his
country to reduce its dependency on oil revenues. His most recent speech on the
topic came in response to Saudi Arabia’s decision earlier this year to drop oil
prices to around $50 per barrel. Ostensibly, the move was meant to boost the
global economy, which in turn would spur demand for their oil, but Iranian
leadership suspected something more sinister was at play. "We assume our enemies
want to damage us by decreasing the price of oil," Ahmadinejad said in a
February speech. Ahead of Iran’s fiscal year, which began in March, the
government’s budget provided for a lowball estimate of oil prices at below $30 a
barrel, versus the actual price of roughly $50 a barrel. This estimate takes
into account the possibility of an "extraordinary" incident—a U.S. military
strike or an all-out civil war in Iraq—that would disrupt its energy exports and
further depress Iran’s oil revenues. In a recent speech, the president also
pledged to develop more fuel-efficient cars and expand public transport systems
to curb Iran’s dependency on oil revenues.
Ahmadinejad’s failed energy policy holds important political
implications. Rationing is not only unpopular among Iranians, but also among
many conservatives in power. A number of influential newspapers have run
editorials panning the president’s misguided economic policies. Last summer, 50
Iranian academics and economists sent an open letter to Ahmadinejad criticizing
his inefficient system of gas subsidies. And results of local elections in
December, in which candidates aligned with Ahmadinejad fared poorly, demonstrate
the popular discontent of the president’s economic and energy
policies.
Eastern Exposure
To soften the blow of UN sanctions and combat its image as an
international pariah, Iran is assiduously working to strike deals with
energy-thirsty countries to its east. Last September, Iran signed a pipeline
deal with Kazakhstan worth $3.5 billion—and followed it in November with an
energy deal with China worth some $100 billion. The agreement with China would
provide annual exports of some 10 million tons of natural gas over the next 25
years and guarantee China’s state oil company various exploration and drilling
rights. More recently, Beijing and Tehran signed a $3.6 billion deal to develop
the South Pars gas field. The Islamic republic also intends to ink a $7 billion
pipeline deal with India and Pakistan by June, though some analysts remain
skeptical that Iran will be able to deliver on the agreement without reforming
its energy sector.
Iran also wants stronger energy ties with Russia. Between the
two countries, they hold half the world’s proven natural gas reserves. Moscow
has helped Tehran build an $8 billion civilian nuclear reactor at Bushehr
(located in southern Iran on the Persian Gulf), set to go online later this
year. Last February, Iran floated the idea of forming a miniature version of the
OPEC with Russia and Qatar to strengthen energy cooperation. The plan would give
states like Russia and Iran greater control over global energy prices and
complicate efforts by the Security Council—of which Russia is a permanent
member—to punish Iran for its defiance.
No one is watching the nuclear standoff between Tehran and
the Security Council more closely than foreign investors. Iran, after all, is an
energy bonanza in their eyes. Its underdeveloped oil and gas fields, the world’s
second largest, scream for outside expertise, capital and technology. But Iran
remains a risky investment target, given its uncertain political climate,
Soviet-style subsidies and inefficient energy policies. If the dust ever settles
from the nuclear issue, sanctions lift and Tehran eases restrictions on foreign
investors, Iran could see its economy soar to new heights. Perhaps the opening
of Iran’s energy sector and the influx of businessmen to its borders could make
the country more liberal and Western-friendly, a preferable outcome to the
current course of brinksmanship-style politics.
Lionel Beehner is a writer for the Council on Foreign Relations’
website.
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