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| World Marketplace |
Running on Empty
Lionel Beehner
06/01/2007
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Iran is swimming in oil and gas.
The country’s known oil reserves are second only to Saudi Arabia’s, its gas
reserves second only to Russia’s. Yet even with such vast subterranean wealth,
Tehran must now rely on oil imports for up to one-third of the nation’s energy
needs and may soon begin rationing gasoline. The country’s oil fields lie in
disrepair because of a lack of development and outside investment. Coupled with
a domestic spike in demand for oil spurred by artificially low gas prices,
petroleum exports have plummeted.
The Islamic republic’s neglect of its energy industry has
considerable economic, political and diplomatic consequences. On the economic
front, the Iranian government relies on high global energy prices to underwrite
generous domestic gas subsidies. A precipitous drop in energy prices, as some
analysts predict, could have dire economic effects and require Tehran to dip
further into its foreign exchange reserves or seek loans from Russia or China. Yet Iran’s leaders do not appear willing to make the long-term investments
needed to kick-start the nation’s pipeline and production capacity. "For the
mullahs, the short-run political return on investment in oil production is
zero," Johns Hopkins University professor Roger Stern wrote in a January 8
opinion-editorial piece for the International Herald Tribune.
Some analysts, including Stern, estimate that Iran’s oil and
gas exports could dwindle to zero within a decade, barring a major influx of
foreign capital or a spike in domestic gasoline prices. Even Iran’s own oil
minister, Kazem Vaziri-Hamaneh, said last September that production could fall
by 13 percent annually unless there is a surge of investment. The International
Energy Agency estimates an additional $165 billion will be needed for Iran to
meet its growing domestic demands and energy production goals set for 2030.
Iran’s current energy crunch has important implications for the global oil and
gas markets. A drastic cessation of its oil and gas exports, either because of
poor economic planning or in response to recent UN Security Council action,
could disrupt world markets and send the price of oil skyrocketing, which would
hit Western economies hardest.
TOP VIEW
Years of mismanagement by ruling mullahs have left Iran’s oil
sector diminished and underperforming. Their negligence, combined with
increasing domestic consumption, has led to a steady decrease in exports. Some
analysts estimate that Iran’s natural gas and oil exports—5 percent of the
world's oil total now comes from Iran—could dwindle to zero within a decade.
Tehran sees little domestic political incentive to address this situation.
Meanwhile, global oil markets watch nervously as a nation with 10 percent of the
world’s known oil reserves squanders its production potential. |
Economists blame Iran’s dilapidated infrastructure for millions
of barrels lost in production each year. For example, the South Pars field,
which lies in southwestern Iran, houses roughly half of the country’s natural
gas, but has yet to be fully developed. Red tape stymies progress as well.
Bureaucratic hurdles, including restrictions on production-sharing agreements
and buyback contracts, make investors uneasy. Recently, the Japanese company
Inpex withdrew its bid to develop Iran’s Azadegan field after seven years of
frustrated negotiations. Credit Suisse stopped taking new Iranian clients in
late 2005 to safeguard its reputation, according to a spokesperson for the Swiss
firm.
Foreign investors are skittish about doing business with
Tehran, given the raft of punitive sanctions imposed by the Security Council and
the cloud hanging over its nuclear program. A number of energy firms, including
BP, have decided against investing in Iran for fear of disrupting their business
ties with the United States. The U.S. Treasury has pressured financial
institutions abroad, particularly in Europe and Asia, to forgo doing business
with Iranian firms with ties to Tehran’s atomic energy program. The prospect of
additional Security Council sanctions, not to mention the heated political
rhetoric between Tehran and Washington and the threat of military escalation,
has created what Conflict Securities Advisory Group’s Adam Pener calls a
"cooling off of the business environment."
Petrol for the People
Iran sits atop 10 percent of the world’s proven oil and gas
reserves, and its economy is almost entirely dependent on energy. Sales of oil
and natural gas account for roughly two-thirds of the country’s income and
three-quarters of total exports—its fields produce 3.8 million barrels of oil
per day, or 5 percent of the global supply. But a number of factors—both
internal and external—have recently contributed to sagging energy exports and
sliding production levels.
Tehran’s bloated subsidies of gasoline also have cooled
investment and contributed to the nation’s energy woes. Iranians pay just 40
cents per gallon for gas at the pump. Cheap energy has spurred domestic
consumption, which in turn boosts demand for cars. Iranian manufacturers churn
out around 1 million automobiles each year, resulting in crowded streets and
rising air pollution. But the effects of these massive subsidies on the
country’s economy have been grave. Energy subsidies cost the government an
estimated $35 billion per year—or one-fifth of its annual gross domestic
product.
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