Energy Politics

Chapter 11. Iran

Chapter 11 Iran Iran’s energy profile is unique: the country possesses the second-largest proven reserves of natural gas and is the world’s fourth-largest producer of oil. At the same time, Iran has no major natural gas export projects, and imports more natural gas than it exports. In addition, over 40 percent of oil production is consumed in the domestic market, and Iran imports close to half its gasoline consumption. Moreover, Tehran is a net importer of electricity. Iran has a modest refining capacity, and thus spends a large portion of its state budget on imported petroleum products . According to President Mahmoud Ahmadinejad, gasoline subsidies cost Iran $5 billion in 2006. The International Monetary Fund estimates that energy subsidies cost the government $20 billion annually, about 15 percent of Iran’s economic output, and contribute to very low energy efficiency. To address the rising expense of subsidies, Tehran in May 2007 announced a decision to ration subsidized gasoline. The policy was met by widespread public outrage, including acts of violence against government institutions and gasoline stations. Iran’s economy and state budget are highly dependent on revenue from oil exports. Hydrocarbons account for over a fifth of Iran’s GDP. Oil revenues make up approximately 80 percent of total export earnings and 40 to 50 percent of government revenue. Ahmadinejad was elected in 2005 on the slogan, ‘‘To put oil revenues on every table,’’ which increased public expectations for additional government expenditures. Yet massive government spending has led to a situation in which little money is left for reinvestment in Iran’s oil and gas production, which has created a large gap between the size of Iran’s oil and gas reserves and its production capacity. Iran’s unique energy profile can be explained in part by its large population of over 70 million, which, consumes over 70 percent of the country ’s gas production. Oil producers with large populations, like Iran, are particularly vulnerable to price fluctuations, having less ability to reduce 150 Chapter Eleven government spending during periods of lower oil revenues. Iran established a national oil fund—the Oil Stabilization Fund (OSF)—in December 2000 with the aim of using it to cushion the government budget from revenue changes resulting from international oil price fluctuations . The Islamic Republic of Iran is a classic energy export rentier state: political power is sustained by massive government spending derived from the revenues from energy exports. Harvard sociologist Theda Skocpol based her important work on rentier states on Iran.1 Skocpol anticipated that regardless of the orientation of the regime, its sustenance through oil revenues would shape its basic structure. During the early days of the Islamic Republic, Skocpol commented: Prerevolutionary Iran was . . . a rentier state, where revenues from exports of oil and natural gas were channeled by the state, not so much into truly productive economic investments, but instead into lavish purchases of modern armaments and into elite luxury consumption. An Iranian Islamic Republic could remain, for quite some time, another sort of rentier state: a populist, welfare-oriented rentier state, with the ulama passing out alms in return for moral conformity on a grander scale than ever before. Unemployment and underemployment could continue at high levels in a stagnant national economy.2 In the last decade, government spending in Iran has been progressively expanding, quadrupling since 1999. The power and ability to provide goods and jobs, despite the lack of production in the economy, contributes to the longevity of the Islamic Republic. The Iranian energy sector is controlled completely by the state. The National Iranian Oil Company (NIOC) and its subsidiary companies perform the majority of the functions in the hydrocarbon sector: exploration , production, distribution, and export. The Iranian constitution bars granting foreigners rights to oil and natural gas production on a concessionary basis or with a direct equity stake. Therefore, despite its vast untapped energy wealth, Iran is not nearly as attractive a target for foreign investment in the energy sector as it would be otherwise. To circumvent its constitutional limitations, Iran has instituted a system of buyback contracts that grant investors the right to purchase particular percentages of a field’s produced oil or gas. The buyback system has major disadvantages for both Iran and the foreign investors. By offering a fixed rate of return, NIOC bears all the risk of low oil prices. The foreign companies do not receive rights to develop or operate their discoveries , factors that affect...