Iran's economic suicide!

A 'horseshoe' covering some 900,000 square kilometres around the Persian Gulf is the locus
of all of the Middle East's supergiant oil fields and accounts for over 95% of regional oil reserves --- Including those of Iran and Iraq. Historically, oil was first discovered in the Middle East at Masjid-i Sulayman in Iran (by George Bernard Reynolds in 1908), to be followed in 1927
by the strike at Kirkuk in Iraq (due to the stubborn efforts of the legendary Calouste Gulbenkian). The government's announcement of rations for fuel caused unrest Tuesday in Tehran. What's happening there, and what do the developments signal for the Iranian government? Angus McDowall, who reports from Tehran for The Independent newspaper in London, talks with Melissa Block. (Listen to NPR)

According to the Oil and Gas Journal, as of January 1, 2006, Iran held 132.5 billion barrels of proven oil reserves. This figure, which includes recent discoveries in the Kushk and Hosseineih fields of Khuzestan province, means Iran holds roughly 10 percent of the world's total proven reserves.Iran's economy relies heavily on oil export revenues, with such revenues representing around 80-90 percent of total export earnings and 40-50 percent of the government budget.

Despite higher oil revenues, Iranian budget deficits remain a chronic problem, in part due to large-scale state subsidies on foodstuffs and gasoline. Thus, the country's parliament (the Majlis) decided in January 2005 to freeze domestic prices for gasoline and other fuels at 2003 levels. In March 2006, parliament reduced the government's gasoline subsidy allocation for FY 2006 /07 to $2.5 billion, compared with a request of $4 billion and costs of over $4 billion for imports last year. As of July 2006, the Iranian government is still debating how to handle gasoline subsidies. NIOC has said it has used nearly all of its $2.5 billion budget for gasoline imports, but legislators have stated their opposition to providing the additional $3.5 billion necessary to pay for imports through the end of the fiscal year, in March 2007 (see Oil section for more on this subject).

In november of last year, a new study by Roger Stern, an economic geographer at Johns Hopkins University published in the Proceedings of the National Academy of Sciences predicted that the Islamic Republic could soon run out of oil to export. "

It is a crying shame that the incompetent IRI has opted to ration fuel rather than dealing with the even harder problem of reducing their (HUGE) subsidies. Gas is roughly 40 cents/gallon in Iran (10 cents/liter ... or about .06 Euros/liter, 1/20th the price it is in France?). The rationing will move the 'extra' gasoline into the black market, where the government/larger population will not gain from the added value above the 40 cents/gallon. That's what happens when your economic advisor is a butcher. To make matters worse, the new sanctions will make Iran to fall short of its oil refining ambition. Why has Iran had to import more than 40% of its gas for more than 2 decades? Where has this ambition been hiding for the past 28 years?

For those who are interested, Iran's ability to export oil given the rate of consumption and population growth is shown in various graphs here .




A Jacksonian did a comprehensive analysis on world's future oil production few month ago and specifically on the future of Iran's oil production. It is a very long piece but well worth the read. Here are the parts that pertain to Iran: (You can read the full text here):

Iran is performing the strangest form of economic suicide I have witnessed: willful degradation of a 'cash cow' the Nation depends upon so that the cow stops giving milk and then dies. Feeding the poor thing lots *now* will just stop up its guts... while it can still operate it needs a limited increase in grazing and a good, thorough exam. Soon there will be a carcass if that doesn't happen, so you won't even get steaks from it. A 'poison pill' that Iran has already swallowed... the Nation will run for awhile, but less well and it will start grabbing for high-cost solutions, like buying gasoline. And that will start a very nasty downward spiral as the motion stable system begins to slow and the wobble builds up and suddenly falls over, heading to the complete stability of death as it turns and turns and turns on the ground going nowhere, save to a stop...

In many ways I agree with your idea of Iran as Socialist concept, but would also say that they have had a strong anti-technology streak in certain areas. While the 'National Flower of Iraq' is the Satellite Dish, in Iran they are attempting the pure Totalitarian move of limiting all 'net access. Throttle it down and thwart it... which just means other conduits will open and distributed comms will start to increase throughput across all the networks to overcome the localized bottlenecks.

The oil industry, however, is retrograde. By actively removing the educational basis for it and the economic understanding of it to fund terrorism, they are going far and beyond even a Soviet concept here... Luddite is more the concept, I think. Just bonkers. Really there is no word to describe it as even the USSR knew it had to re-invest in its oil fields. Its industrial production was junk, but the idea was in the right place. Iran has neither the industrial capacity nor the educational capacity to understand this, now.

I actually expect depletion to be reaching levels where it can't increase in amount as actual reserves and ability to pump it from the ground are going down.Perhaps pre-industrial is what this is? Used more to the concept of 'piece work' rather than industrial integration. Any way you cut it the multiple feedback mechanisms no longer work and a downward spiral will begin within the next year or so, especially if they get put out of OPEC as a reliable supplier. Without steady export output, contracts for the long term start to dry up. If that is not addressed then the oil trade slowly moves to the spot market, where daily fluctuations will destroy any Nation depending upon it.In the petroleum industry, there are few forms of adding capacity: exploiting new fields, expanding on old fields, rejuvenating old fields. Each of these have overhead time and cost and a multi-year timeline to them. The longest is the new field area, which can be as long as a decade to finally get economic production from a field. It adds yield, but at a higher marginal cost. Expanding old fields is only a 2-5 year timeline, but that is based on the 'knowns' of subsurface configuration and expected reservoir size. This will increase depletion of the field, but has a lower marginal cost and is the easier route to go with, especially on large fields. Rejuvenation starts with the repressurizing scheme, of injecting natural gas *into* the field to raise pressure levels and force oil through the pore space. After that you start to look at some more exotic techniques, each of which cost more to do.

The marginal cost is higher than expansion but lower than new field work. While we may view those from the outside as 'chunks', to the industry these are minor and discrete operations towards an operational system. Still, $70 billion by Chevron in Canada is a huge investment and they promise lots more behind them as do the other companies.Iran is not expanding oil output via new reserves nor by expanding on existing reserves in an amount that is above domestic use. Further, their subsidized use of natural gas puts the cheapest form of rejuvenation in peril. This isn't Socialist... its asinine. Even Socialists *try* to understand industrial production cycles. This? A rare form of seppuku. Take all the regulators and sensors off your servo, feed in a 'dirty' power stream and put a large delay on any control on the system or, no control for balance and see if it can stay in place. Something has got to give. In Iran it will be the refineries which are the most complex part of a complex system. Probably not with a bang, just a sigh of relief that they aren't going to be abused any more.

The Cartels are actually only being set up to meet demand at a given price point. Their goal is to control the price point by their own supply of product. They were much more powerful when they had less competition, but their overall part of global production has been in decline for some years. And they have to be in this wonderful bind of having to either 'cover' for Iran or increase quotas and curse Iran. At some point they will realize that Iran is no longer an 'Exporting' Nation that is reliable. Cartels love reliable environments and seek to manipulate those. Throw a spanner in the works and they seize up and fly apart. The question is: which spanner gets them first? Iran or Canada? My guess is Iran, based on spin-up time for the Canadian fields, and the rate of increase of Iranian problems.It is very telling that not even Gazprom will touch Iranian production. Of course Russia has been faced with insurgents backed in the Chechen region by both al Qaeda and Iran, so they may be having an internal problem deciding exactly how to treat Iran. If I were into conspiracies, I would almost suspect Putin of encouraging the decline of the Iranian petro-industry to hand the West a long-term problem. China, of course, just wants oil, but even *they* haven't invested in the petro-industry in Iran, which is saying a lot, right there.

So much for their 'Russian and Chinese friends' who will give Iran nominal cover so long as they continue to pony up and buy hardware from them. One does wonder if such 'support' will last past the point that Iran can no longer buy anything from them nor pay off its debt....The analysis at multiple levels is difficult without knowing exact conditions. Iran, internally, is coming apart already as seen by student and worker demonstrations. Older, 19th century, divisions are reappearing *again*, with even a Monarchist faction still there. On a nearby regional basis and global basis the question is: how will Iran collapse? When is now a min/max timeline that I see starting in 2010 or so and ending at 2019, but the instabilities are now too numerous to fix a lower date anymore.

From unstable regimes seen in the world prior to this, things rarely go to an extreme and often collapse before that... the American and French revolutions come to mind, while the Russian Revolutions are more towards maximum dissatisfaction being reached. They may try to put the al Qaeda management of savagery approach into play to become a distributed threat, but without a State sponsor... well that puts them on par with al Qaeda's poor rich man's road to Empire. The Persian population of Iran should prove relatively cohesive, but the multiple ethnic minorities at the periphery, those have serious problems some of them now wanting to *be* in Iran to start with.Behind all of that is the view that the Middle East has nearly plateaued in oil production capability and they are now on a depletion curve over the next 50 years. OPEC has not only gone downwards in market share and power, but also in pure output capacity. While they have 'reserve capacity' that means that if that is used you get increased depletion of the oil fields and a shorter lifespan of them.

To milk the cash cow longer, they would like to extend the life of their oil fields at the minimum necessary export amount to get them the maximal cash influx. What they have forgotten is that modern life runs on petro-chemicals and even tiny Nations like so many of the Emirates, are facing increased demand curves at home. Iran has this in spades with a huge population and subsidized fuel - a double-whammy that will get them in the end. Even if China, as I have heard, wants to put in lots of money, they may be faced with the regime actually *removing* Iranian money and depending on Chinese money, and the Chinese are unprepared to be the servants of Iran. Really, though, one Nation cannot hope to fill the multivariate needs of Iran's petro-infrastructure, and I doubt that any amount of Chinese money or skill will do more than steady the plateau or slow the downward spiral. That is at best... at worse it will be money down the drain and a rebellion changing the Nation and deciding not to pay off any debts. Funny how Socialist regimes do that and then get peeved when others do the exact same thing to them.

Previously:
Iran's oil problem

Analysis says Iran's oil revenue is going to be Zero by 2015