How dependent on oil is Iran?
Massively. Iran has the world’s second (or according to some, the third) largest proven reserves of oil, and currently earns around $50bn a year from exports. Its government is critically dependent on oil revenues, which account for more than 70% of its income. The surging oil price of the past five years has enabled the Islamist regime led by President Mahmoud Ahmadinejad to spend freely on welfare and social programmes; since 1999, government spending by Tehran has quadrupled. But that level of oil dependence and free spending is not sustainable. There are now signs that the government’s massive spending on petrol subsidies – in effect buying political stability by giving the population cheap fuel – might be ending in tears.
What’s happened?
At the end of June, a popular backlash against fuel rationing sparked riots as around two dozen petrol stations were attacked and set ablaze. Ahmadinejad, who came to power in 2005 promising to put Iran’s oil wealth straight “onto the tablecloths” of ordinary people, was the focus of protesters’ anger, after his government introduced a new limit of 26 gallons a month for all motorists, giving only two hours’ notice. There’s no doubt Tehran urgently needs to cut spending on fuel subsidies. Foreign Policy magazine says they account for 38% of its national budget – the biggest proportion of any country in the world, nearly four times as much as even Saudi Arabia – and 15% of GDP. But angry Iranians argue that they live on top of a sea of oil and should have unfettered access to it. That makes the government extremely vulnerable.
What’s gone wrong?
Iran may be oil rich, but it suffers major structural problems when it comes to exploiting this fact. Its turbulent political history (and the disincentive that presents to investment) has left it with too few refineries to meet demand for fuel. Ahmadinejad’s dedication to unsustainable fuel subsidies has led to an explosion in domestic demand, forcing the country to spend up to $6bn a year on imports of refined petroleum. That leaves it vulnerable to economic sanctions by the West, which is pressurising Iran to halt uranium enrichment. A recent report from the London-based Centre for Global Energy Studies (CGES) suggests that subsidies have led to a boom in fuel consumption “through wastage, misuse and the smuggling of petroleum products out of the country”.
Why smuggling?
Because there’s massive profit to be made. Analyst John Mauldin points out that while Iran has some of the world’s cheapest fuel ($4.49 to fill up a Honda Civic), Turkey has the most costly fuel ($93.98). One man with a large truck can make up to $3,000 in one border crossing – about the same as Iran’s annual GDP per head. For all these reasons, Iran’s oil sector is approaching crisis, with some analysts arguing that the current level of exports – four billion barrels a year, down from six billion before the 1979 revolution – is set to fall further over the next decade.
What about gas?
Iran has the world’s second-largest proven reserves of natural gas after Russia, with 28 trillion cubic metres (cm). These two states, plus Qatar, have far gas more than any other nation. Yet, astonishingly, Iran is a net importer of gas. In 2005, it exported 4.7 billion cm, but imported 5.2 billion cm, according to Opec. In part, that’s due to Iran’s fraught international relations. The United States imposed unilateral sanctions on investment in Iran, and recently reconfirmed them, as tensions rise over the country’s nuclear ambitions. It is also partly due to Iran’s geography: Iran’s most obvious pipeline gas markets present difficult obstacles to both East and West – political ones in the case of India and Pakistan, and over-contracted supply in the case of Turkey. But Iran doesn’t do much to help its cause.
In what way does Iran make itself unpopular?
Iran’s system of ‘buy-back’ contracts is hugely unpopular. Essentially, Iran forces foreign investors in its natural resources to take on Iranian government debt, offering a fixed return that’s vulnerable to high levels of Iranian inflation. That puts off international oil firms from getting involved, which means development of Iran’s oil and gas fields has been slowed down. Second, Iran’s mix of abundant oil plus very limited refining capacity means that much of its natural gas is used up domestically – either to free up oil for export or to prolong the lives of existing oil fields by ‘reinjection’. All this makes Iran’s ambition to become a major world exporter look shaky, to say the least. As a result, the CGES study concludes, Iran’s energy sector is in crisis.
What could Iran’s oil crisis lead to?
In a study published late last year, US academic Roger Stern predicts that Iran’s oil revenues are set to halve over the next five years and may disappear altogether by 2015 – and that “the regime’s ability to contend with the export decline we project seems limited”. If, as seems likely, that pressure makes the Iranian regime increasingly unstable – and ever-more attached to the nuclear route as a source of cheaper energy – then there is a greater possibility of military conflict and disrupted oil supplies from Iran and the wider Middle East. As the CGES study puts it, Iran’s energy crisis has “potentially dramatic consequences for the world oil market and the global politico-economic system”.