Subsidies and Sanctions: Iran gets high marks in IMF review. Energy Analysis by Mary E. Stonaker
Alarabiya--Iran stands to gain $50 billion in increased energy revenues if drastic subsidy reforms are able to bring its gas prices up to Free-On-Board (FOB) Persian Gulf prices. Further increased revenues may double that figure, given continued strict reforms across its economy.
The International Monetary Fund (IMF) commended Iran’s initial efforts in a statement released last week, citing lowered average inflation rates and a “broad reorientation of the economy towards less energy-intensive products and services, and product technologies.” The evolution from a developing to a developed country, in economic terms, hinges on that move towards less energy-intensive industries.
With energy subsidies amounting to $101 billion, a bill approved by the Iranian parliament in January 2010 stated that such subsidies should be slowly removed to increase energy efficiency which will result in more energy available for export.
Before reform efforts, Iran’s energy intensity was four times greater than the world average. Despite only doubling its population over the past three decades, Iran’s energy consumption increased five-fold over the same period.
Iran’s energy sector suffered from state-controlled markets, inducing artificially low and unsustainable prices.
New policies aim to allow competitiveness, increased efficiency, and the entrance of renewable energies to the common marketplace.
Iran holds significant reserves of both oil and gas with proven oil reserves of 137.6 billion barrels and 1,045 trillion cubic feet (Tcf) of proven natural gas reserves. The geographic location of Iran gives it 40 producing oil fields both onshore and offshore as well as a majority claim to the largest proven contiguous offshore gas field, South Pars.
In 2008, Iran produced 4.2 million barrels per day of petroleum liquids, 3.9 million bbl/d of which was crude oil – overall five percent of the world’s production. As the world’s fourth largest oil exporter, Iran exported 2.4 million barrels of oil per day, mainly to Asia and Europe.
Despite these massive reserves, Iran announced its intentions to double its gas imports from Turkmenistan to 40 million cubic meters per day. This energy-rich nation was forced to import due primarily to the formerly high subsidy rates, which encouraged inefficient usage by Iranians, forcing them to import the balance.
Poor infrastructure development, caused by long-term sanctions, also eroded Iranian abilities to produce their own energy.
The 1979 revolution began an era of Iranian history, which saw devastation and neglect to energy infrastructure amongst others. Compounding the difficulty, Iran’s fields have a natural decline rate of about 8 percent onshore and 11 percent offshore without the use of EOR techniques.
Temporary solutions include increased investment in infrastructure of gas exploration and production, power generation and the transmission and transportation of energy types.
The problem with such “solutions” is that they do not address the heart of the problem: a lack of market-regulated prices which distort demand and continually create supply shortages.
Given its reserves, if Iran’s refineries received updated infrastructure and technology, Iran could potentially eliminate imports altogether.
Subsidies have been given to the Iranian people in various forms of either direct discounts or indirect support of a given commodity, such as petrol or electricity. Food and housing subsidies existed as well though this analysis will be confined to the energy sector. These subsidies, made commonplace after the 1979 revolution, afforded the leaders greater public favor, which translated into tighter control.
Gasoline consumption in Iran hovered around 400,000 bbl/d in 2008. Subsidies and increased industrial growth have increased demand over the past decade causing Iran to become a net importer. In 2009, 80 percent of Iranian imports were gasoline, at 130,000 barrels per day.
Iran’s energy subsidies have caused a national budget deficit along with the need for imports despite vast reserves and have left an economy unprepared for international market competition. The cost of energy to Iranians is often less than even the cost of production.
In the past decade alone, Iran’s oil consumption has increased 42 percent – the greatest consumer in the Gulf region. This figure can be compared to decreases witnessed in US (-4 percent), UK (-6 percent), Germany (-14 percent), and Japan (-21 percent) during the same time period.
High subsidies constituted a major stumbling block on the path to liberalization of energy markets.
As noted by the IMF, Iran has recognized that it is imperative that its energy sector open its markets to allow for a more efficient allocation of resources after many years of fruitless debates.
The aim towards open, internationally-competitive markets is where Iran faces a rather unique challenge.
The development of its nuclear program outside the purview of the IAEA caused concern in the west as to the true nature of the “could be weapons of mass destruction” technology.
Alternatively, however, the plants could be used peacefully to generate much needed electricity. It has served as an excellent source of clean energy across Europe yet the political nature of Iran has brought their nuclear intentions into question.
Sanctions against Iran’s energy sector have been in place since the 1979 revolution but more specifically since 1995.
Laws have been passed in the US forbidding American investment in Iran’s energy sectors as well as requiring the imposition of sanctions on any country investing more than $20 million per year in said sectors. Nations around the world have reduced investments though none have been hit with additional sanctions for this reason,
yet.
Continued…
Before reform efforts, Iran’s energy intensity was four times greater than the world average. Despite only doubling its population over the past three decades, Iran’s energy consumption increased five-fold over the same period.
Iran’s energy sector suffered from state-controlled markets, inducing artificially low and unsustainable prices.
New policies aim to allow competitiveness, increased efficiency, and the entrance of renewable energies to the common marketplace.
Iran holds significant reserves of both oil and gas with proven oil reserves of 137.6 billion barrels and 1,045 trillion cubic feet (Tcf) of proven natural gas reserves. The geographic location of Iran gives it 40 producing oil fields both onshore and offshore as well as a majority claim to the largest proven contiguous offshore gas field, South Pars.
In 2008, Iran produced 4.2 million barrels per day of petroleum liquids, 3.9 million bbl/d of which was crude oil – overall five percent of the world’s production. As the world’s fourth largest oil exporter, Iran exported 2.4 million barrels of oil per day, mainly to Asia and Europe.
Despite these massive reserves, Iran announced its intentions to double its gas imports from Turkmenistan to 40 million cubic meters per day. This energy-rich nation was forced to import due primarily to the formerly high subsidy rates, which encouraged inefficient usage by Iranians, forcing them to import the balance.
Poor infrastructure development, caused by long-term sanctions, also eroded Iranian abilities to produce their own energy.
The 1979 revolution began an era of Iranian history, which saw devastation and neglect to energy infrastructure amongst others. Compounding the difficulty, Iran’s fields have a natural decline rate of about 8 percent onshore and 11 percent offshore without the use of EOR techniques.
Temporary solutions include increased investment in infrastructure of gas exploration and production, power generation and the transmission and transportation of energy types.
The problem with such “solutions” is that they do not address the heart of the problem: a lack of market-regulated prices which distort demand and continually create supply shortages.
Given its reserves, if Iran’s refineries received updated infrastructure and technology, Iran could potentially eliminate imports altogether.
Subsidies have been given to the Iranian people in various forms of either direct discounts or indirect support of a given commodity, such as petrol or electricity. Food and housing subsidies existed as well though this analysis will be confined to the energy sector. These subsidies, made commonplace after the 1979 revolution, afforded the leaders greater public favor, which translated into tighter control.
Gasoline consumption in Iran hovered around 400,000 bbl/d in 2008. Subsidies and increased industrial growth have increased demand over the past decade causing Iran to become a net importer. In 2009, 80 percent of Iranian imports were gasoline, at 130,000 barrels per day.
Iran’s energy subsidies have caused a national budget deficit along with the need for imports despite vast reserves and have left an economy unprepared for international market competition. The cost of energy to Iranians is often less than even the cost of production.
In the past decade alone, Iran’s oil consumption has increased 42 percent – the greatest consumer in the Gulf region. This figure can be compared to decreases witnessed in US (-4 percent), UK (-6 percent), Germany (-14 percent), and Japan (-21 percent) during the same time period.
High subsidies constituted a major stumbling block on the path to liberalization of energy markets.
As noted by the IMF, Iran has recognized that it is imperative that its energy sector open its markets to allow for a more efficient allocation of resources after many years of fruitless debates.
The aim towards open, internationally-competitive markets is where Iran faces a rather unique challenge.
The development of its nuclear program outside the purview of the IAEA caused concern in the west as to the true nature of the “could be weapons of mass destruction” technology.
Alternatively, however, the plants could be used peacefully to generate much needed electricity. It has served as an excellent source of clean energy across Europe yet the political nature of Iran has brought their nuclear intentions into question.
Sanctions against Iran’s energy sector have been in place since the 1979 revolution but more specifically since 1995.
Laws have been passed in the US forbidding American investment in Iran’s energy sectors as well as requiring the imposition of sanctions on any country investing more than $20 million per year in said sectors. Nations around the world have reduced investments though none have been hit with additional sanctions for this reason,
yet.
Continued…