Beyond the Resource Curse

4. The Illusion of Unlimited Supply: Iran and Energy Subsidies

4 The Illusion of Unlimited Supply: Iran and Energy Subsidies Ahmad Mojtahed Iran, one of the world’s largest energy producers, also has some of the world’s lowest domestic energy prices. This would seem to be an economic advantage, but the Iranian government has kept energy prices artificially low through a series of subsidies. These subsidies have created significant distortions in Iran’s economy, including an inflation rate that reached 25.4 percent in 2009. The Central Bank of Iran in 2008 estimated the annual amount of energy subsidies in Iran from 2001 to 2007 (see Table 4.1). Energy subsidies increased from $15.2 billion in 2001 to $87.6 billion in 2007. These figures mean subsidies increased from 7.6 percent of Iran’s GDP to 26.2 percent of its GDP during this period. By any economic standard, this amount is too large and indicates inefficiencies and a waste of resources in the Iranian economy. The costs of these subsidies are profound. The Iranian Oil Ministry estimates that the Iranian government as recently as 2005 spent more than a third of its budget on energy subsidies—an astronomical sum that amounts to almost a quarter of Iran’s GDP. In addition, Iranians have become accustomed to low energy prices and use more energy than they would if domestic prices were more in line with prices on the international market. Iran’s total domestic energy consumption growth rate was 6 percent from 2000 to 2006, which is very high with respect to other countries. Even though it has some of the world’s largest energy reserves, Iran’s largest im- The Illusion of Unlimited Supply 111 port in terms of value is petroleum products. Iran has oil and natural gas that remains to be developed, but the state will not meet increasing domestic demand through drilling alone. Several members of the Iranian political and economic elite have identified the problems that energy subsidies have created for Iranian society and want to eliminate them. During President Ahmadinejad’s second presidential term, the Iranian Parliament began to consider a bill that would increase the price of gasoline to $0.43 a liter—still well below the price in most countries, but a 396 percent increase for Iranian consumers. Some projections suggest this type of change could cause a short-term contraction in Iran’s GDP, but some economists disagree and stated “an increase in energy prices decreases its consumption and causes increase in efficiency and production .” This kind of dramatic economic change presents significant political obstacles. The Iranian government will need to offset these changes through other economic and transportation policies, including the expansion of public transportation in cities and the development of energy conservation policy in industry and housing. This chapter examines Iran’s recent history of energy subsidies, proposals to reduce these subsidies, and attempts to bring Iran’s energy prices more in line with international norms. Table 4.1 Energy Consumption, Prices, and Subsidies in Iran (2001–7) Year Total final consumption (barrel of oil equivalent) Domestic energy price (rials/liter) International energy price (rials/liter) Energy subsidies ($ billion) Subsidy as percent of GDP* 2001 149.9 230 687 15.2 7.6% 2002 165.7 259 1,281 21.1 13.2% 2003 174.4 318 1,391 22.6 12.2% 2004 189.3 360 1,966 24.8 15.8% 2005 201.2 356 3,003 59 23.5% 2006 208.4 352 3,449 70.1 25.9% 2007 214.7 382 4,206 87.8 26.7% Average growth rate 6.2% 9.3% 37.6% 35.6 26.2% Source: Central Bank of Iran, Energy Subsidies Report, Tehran, 2008. *Iran’s cumulative total energy subsidy from 2001 to 2007 was $446.1 billion. 112 Ahmad Mojtahed Iran’s Energy Background With a population of 71.5 million and area of 1.64 million square kilometers , Iran is among the world’s twenty largest countries in both population and size. Iran is also a resource-abundant country with vast energy reserves and minerals such as iron, copper, zinc, and chromium. Iran’s proven natural gas reserves in 2006 totaled 28.1 trillion cubic meters, which is 17 percent of the world’s total reserves and ranks second only to Russia. In addition, Iran’s oil reserves of 137.5 billion barrels are the fifth largest in the world. Iran...