A key question, though a bit late

The country’s unprecedented $120 billion revenue during the past two years and the government’s debate with economists over the issue has put an important economic question -- although a bit late -- before decision-makers, led by Mr. President: “How should oil revenues be spent?”

      Such a question should be regarded as one of the basic questions in economic planning, and the answer to it should lay the foundation for development plans. In order to answer this question, first a sound and broadly consented analysis and definition of oil should be developed. Without reaching consensus on the characteristics of oil and on its value, planning for it will prove to be a difficult task.

Oil enjoys at least five characteristics:

1. Oil is wealth and capital, and not revenue;

2. Oil is a depleting and non-renewable asset;

3. Oil is an inter-generation asset and does not belong to a specific generation;

4. Oil is not an asset in the monopoly of the government;

5. Oil is a national security tool and a foreign policy lever and enjoys simultaneous strategic application.

However, there are certain points about each mentioned specifications:

1. Oil as an asset: By admitting that oil is our national wealth and capital, we agree that it should not be exhausted or wasted. Even more important, oil should be utilized in an income-generating method. In other words, oil revenues, instead of being used up, should be converted into assets and capital that would produce revenues. That is, earning money out of oil is possible not in the first place; rather, it is possible in the second stage -- after it has been changed into capital. On the other hand, if oil is considered an asset, then clearly we should consider it as having the potential to uphold its value. Wealth and capital are constantly used for saving value and for gaining financial power. In fact, this type of wealth has no immediate or current application; rather, it has a sustainable and long-term application. Therefore, when spending oil revenues this point should also be taken into consideration. 

2. Oil is a depleting asset: Again, if we have accepted that oil is a depleting asset, we should take two other facts into consideration. The first is that we should not spend it hastily. In fact, by identifying optimum amount of production, and with sound planning, we will avoid the possibility of wasting it. Second, we should gradually substitute it with the help of assets and capitals that are earned through it. In other words, we should take advantage of oil by creating new capital to compensate for depleting oil reserves.

3. Oil is an inter-generation asset: Such a characteristic brings us to at least two considerations. First, oil should not be consumed so that it will be used up, leaving nothing for the future generation. Second, it cannot be granted to the present generation at a very low price because it may drive the future generations into the deadlock of high prices. With regard to the fact that with the depletion of oil reserves, the capacity of this vital substance diminishes, its price should actually be increased. If we fail to adjust the price of oil in harmony with its specifications, we have committed an injustice against future generations.

4. Oil is not an asset in the monopoly of the government: Oil belongs to this homeland and its people: the people of today and the people of tomorrow. In other words, governments should not use oil as a tool for their immediate income; instead, they should employ it for the realization of their targets, which normally include short-term plans. In using an asset such as oil, governments should not interpose their political and publicity aims. Although, it is very hard to avoid this situation because governments in oil producing countries usually count on oil revenues as a means for their survival and sustainability. However, these governments should take measures so that oil revenue can be put at the disposal of the public. I will elaborate on the process for such an accomplishment in the next few lines.

5. Oil is a national security tool and a foreign policy lever: Oil is the most important source of fossil fuel in the world, and so far no suitable substitute has been found for it. It is the main engine in the world economy and at the same time it is a scarce substance. As such, countries rich in oil resources and reserves enjoy a strategic significance. In fact, these countries can take advantage of this God-given wealth for the realization of international policies and the establishment of sustainable security. It is interesting to note that major oil companies of the world, known as the “Seven Sisters” in 1960s and 1970s, were for years taking advantage of the long-term concessions that had been granted to them for the exploitation of oil resources in other countries as a powerful political lever.

         Today, and following the nationalization of oil resource, these companies possess only 15 percent of the world oil resources. The remainder belongs to the oil producing countries, which should use such assets prudently. Taking optimum advantage of oil, and using strategic tools that maintain long-term security, necessitates special planning with specific design. Perhaps some would imagine that oil could be easily used within the context of “distrainment” and as a political tool vis-à-vis oil demands by other consumers. However, in the absence of a powerful presence in the oil market it could not be employed as a strategic tool at all. Such a specification gains greater significance when we come to know that our country possesses the world’s largest fossil fuel resources. The total proven oil and gas reserves in Iran have been estimated at over 300 billion barrels of oil. This figure which even surpasses reserves in Saudi Arabia puts our country in the first place.

      Yet, it should be noted that taking advantage of such resources for the maintenance of national security is possible only when we show an active presence in the world energy market and gain a suitable share of it. In other words, only when we potentially create the required demand and make others dependent on us. 

Now, with regard to the above-mentioned specifications, it will be easier to answer the salient question of how oil revenues should be spent. Here, three inter-related questions are pertinent:

o                                                        How should we spend oil revenues?

o                                                        Should this revenue be deposited abroad or should it be transferred to the country?

o                                                        How should oil revenue be preserved -- in foreign currency or in rial?

How should we spend oil revenues?

Based on the above-mentioned points, oil revenues should be divided into five parts:

      First, parts of oil revenues should be spent for the oil sector in order to maintain optimum sustainability and productivity of the resources. Lack of attention to such an important task will affect efficiency of oil wells, reduce production capacity and disturb use of oil for any type of consumption. To this end, the most proper way is to practice “ownership interest” of oil as stipulated in the Fourth Development Plan. On the one hand, the National Iranian Oil Company should calculate its production expenses, increased productivity and preservation and maintenance of its reserves and carry on with its activities within the framework of an efficient company. On the other hand, the government will be able to gain its revenues through ownership interest that it collects from the National Iranian Oil Company. Meanwhile, the government should perpetually evaluate performance of the Oil Company on the basis of reliable criteria and standards and should expect the company to deliver maximum productivity.

      Second, parts of the oil revenue should be spent on transforming oil into an asset that generates capital and income. To this end, parts of oil revenues should be saved in a special investment fund. Then, by using the capital of this fund, investments should be made in international capital markets and the revenues gained thereby could be spent for domestic purposes. Such a practice has already been experienced in certain oil producing countries and the result has been satisfactory to the extent that presently revenue of those countries from their investment fund is higher than their total oil revenues. Such an approach could also meet the inter-generation demand for oil reserves, because in this way oil revenues will be turned into sustainable assets and will consequently have constant financial yield.

      Third, optimum advantage should be taken from oil revenues for the implementation of development plans in the country. Development of the country’s infrastructure in different fields such as energy, communications, transportation, major industries, education of human resources and preservation of health are among important fields in which oil revenue can be invested. Huge sums of money have been allocated to this sector. This requires sound planning in which at least three points should be taken into consideration: balanced coordination among different offices of the oil sector; the establishment of equilibrium and justice in different regions; the country’s development with regard to available potentials; and global facilities (such as capital, technology and pricing mechanism and its application).

      Fourth, portions of oil revenue should be deposited in a fund to deal with fluctuations in oil prices. This is the same mechanism that was deployed in the Third Development Plan under the title of ‘Foreign Exchange Reserve Fund’. As it is understood from the fund’s definition, its first application is to create confidence about income stability while its second application is to help progress of development plans in the private sector.

      Fifth, the ideal situation is that no part of oil revenue is spent on current expenditures; however, this situation is almost impossible given the prevailing demands, therefore parts of those revenues should inevitably be allocated to such expenditures. Nevertheless, simultaneously efforts should be made to minimize that portion. In its ideal state, a maximum of 75 to 85 percent of oil revenues should be allocated to current and future development expenditures while the remainder should be divided between the two proposed funds or accounts.

Should oil revenue be deposited abroad or should it be transferred to the country?

      Some believe that considering the conditions that have emerged because of the imposition of sanctions, all oil revenues should be transferred to the country. However, such an idea is neither logical nor practical. It is not logical because keeping such revenues outside of the country will provide us with the opportunity to be connected to monetary and financial markets. At the same time, it allows us to take advantage of the facilities of those markets in order to increase efficiency of our money. China has deposited a large amount of its savings in monetary and financial markets in the US and in Europe. 

      It is not practical because the only way to transfer this money into the country is to bring in the original money either in the form of banknotes or as gold. In the meantime, the money brought into the country in this way should once again be transferred out of the country for foreign purchases. On the other hand, the domestic monetary and financial market does not have the required capacity to absorb oil revenues so as to guarantee efficiency of such amounts. Therefore, a major portion of the revenue should always be kept outside the country as well as in international markets. Of course, if we manage to gradually turn our country into a regional monetary hub, permit foreign banks to become operational in the country and make our monetary sector free to an outstanding extent, then we could be hopeful that a considerable portion of our oil revenues would be transferred into the country and would be deposited in different Iranian and foreign banks.

How should oil revenues be preserved -- in foreign currency or in rial?

      Exchange of oil revenues in rial is necessary only when we intend to spend it. Exchange of foreign currencies in rial will increase the money base and result in inflation. Some people might resort to the rationale that the entire oil revenue should be spent for the welfare of people. However, it should be taken into account that government expenditures will foment inflation. Furthermore, if the government fails to accomplish such a task gradually and through sound planning, it will result in the emergence of heavy inflation and creation of disturbances in the country’s economy. This can be likened to the need of arid lands and fields for water. As lands and fields are in need of water, people and the country’s economy are in need of money.

However, maintenance of water and its systematic distribution for irrigation of arid lands calls for building of facilities such as dams. Without dams, rain water will be wasted or become destructive in the form of floods. The hard currency obtained through selling oil should not be exchanged in rial. Rather, it should be kept behind a dam and should not be exchanged with the stronger currencies. This can be accomplished in the light of the above-mentioned planning.

      In brief, unplanned spending of oil revenues, especially in large amounts, is a dangerous task. Money without planning will result in inflation and disturb the living and economic activities of the people. The outcome of such a trend is adverse social reaction, which will lead to double the harm -- a trend which results in neither development, nor the preservation of oil revenues.

      Now that we are enjoying an unprecedented amount of oil revenue in the history of our country, we ought to carry out the required planning with regard to the above-mentioned specifications. Otherwise, we will most definitely be faced with dangerous monetary and inflationary currents