IRAN The geo-strategy of oil (18 July 2007)

ISN Security Watch

18 July 2007

Iran: The geo-strategy of oil

Image: Roozbeh Feiz, Flickr

Even with its strength as one of the world's largest oil producers, Iran is dependent on foreign energy and is taking stiff measures to rectify the situation.
By Kamal Nazer Yasin in Tehran for ISN Security Watch (18/07/07)
To many, Iran is an energy giant. The country possesses over a quarter of the world's known oil and gas reserves. It is the second largest oil producer among OPEC countries and it has abundant natural resources which make it ideal for producing electricity.
Vast inefficiencies and abnormalities, however, mar this idyllic picture. Iran's oil production has been declining steadily from its pre-revolution peak of 6 million barrels per day (bpd) to its present 4 million bpd - below its OPEC quota - due to war, sanctions, low investment and depletion. Iran's consumption of petrol has increased at 11 percent per year. If the present trend continues, by 2015, Iran will have become a net importer of petrol.
The Islamic Republic's official GDP is approximately US$196 billion. Yet, according to the newspaper Hamshahri, each year, the government spends roughly US$55 billion for the country's energy needs including US$35 million in direct subsidies. In other words, 28 percent of the economic output is spent on basic energy needs. These huge and cheap energy inputs are needed to run the largely inefficient state-owned enterprises, to placate the public with dirt-cheap utility rates and to help out Iran's strategic friends around the world.
Without any doubt, petrol wastage occupies the prime place among all of the various economic distortions in Iran. Despite its enormous oil reserves, Iran imports 43 percent of its petrol needs from other countries due primarily to huge domestic demands as well as lack of sufficient refining capacity.
The country's average daily use is around 70 million liters per day, roughly equal to China's daily consumption, but the latter's population is 18 times larger. Economists attribute several factors for this situation. These include gas-inefficient automobiles, high population growth, the voraciousness of consumers and its super cheap petrol prices.
Until 27 June, petrol was 9 cents a liter, making it among the cheapest in the world. It takes no more than US$5 to fill up a car in Iran, compared to US$40 on the average in the US and US$90 in neighboring Turkey.
With Iran's highly protected automobile industry and cheap financing - spurred on by President Mahmoud Ahmadinejad's encouragement of car sales - manufacturers have no incentive to produce gas-efficient cars. According to a study by the financial newspaper Donay-e Eghtesad, 30 percent of the cars currently in use, consume 3 times more petrol than the international average.

Smuggler's paradise

One of the most glaring by-products of the abnormally cheap gasoline prices is crossborder smuggling. According to the newspaper Siasat-e Rooz, smuggled petrol from Iran accounts for 10 to 14 percent of Pakistan's fuel needs.
Iran shares vast border areas with Iraq, Pakistan, Turkey and other states; too vast for law enforcement forces to fully patrol. Mules, pick-up trucks, and tankers line up at major crossing points each day to carry Iran's heavily subsidized gasoline to other countries.
The arbitrage could be quite huge. Iran's anti-traffiking chief has been quoted in reports as saying that petrol smuggling is more profitable - and much less risky - than narcotics trafficking. According to an 8 July report in the newspaper Iran, petrol prices are more than 20 times higher in Turkey, 10 times higher in Pakistan and northern Iraq and 7 times higher in Afghanistan .

Using oil as geo-strategic weapon

"Oil is both Iran's strategic strong point and its strategic weak point," an Iranian political scientist told ISN Security Watch on the condition of anonymity. "It has given the state an unrivaled ability for maneuvering in both the domestic and the global spheres.
"But because of the same reasons, if the present structural distortions are not corrected, it can pose major security problems for the government."
Aside from these factors, the academic pointed to the looming threat of economic sanctions should Iran's relations with the US and the international community deteriorate further.
US President George W Bush recently renewed a bill imposing sanctions on international companies that invest more than US$20 million in the Iranian energy sector.
More ominously for Iran, in June, the US House of Representatives proposed legislature designed to curtail Iran gasoline imports through punitive measures against financial and business entities that assist Iran. If signed into law, these companies would be denied access to the US market.
According to the academic, Iran's leadership has belatedly come to take note of these dangers and take action to remedy the situation.

A crash course in rationing

On the night of 27 June, with three hours notice, the Iranian government announced that automobiles would be allowed only 100 liters per month and the price would be raised to 11 cents per liter. The announcement was followed by rioting - complete with angry mobs burning down several gas stations and looting some government-owned stores - and motorists lining up to take advantage of the last few hours of cheap petrol.
Despite these missteps, the measure seems to have worked. In the first week after the new rationing program was introduced, traffic was down by 25 percent and petrol consumption was reduced by 28 percent. For the first time in years, it was possible to drive in Tehran without being affected by its notorious traffic jams and air pollution.
Fatemeh Vaez Jafari, one of Iran's several vice presidents, said in an interview after the rationing: "Since our enemies have realized they couldn't stop our nuclear program by force, they have started to focus on targeting us by going after gasoline imports." She added: "The rationing has dismayed them completely. This was so important we can even call it a real revolution."
As far as smuggling, the news daily Ressalat reported that in northern Iraq, petrol prices had gone up from 950 dinars (77 cents) per liter to 1,300 dinars.
"The government realizes it is in a race against time," said the academic. "Other than this [petrol rationing], there are crash programs for increasing refining capacity and for converting cars to natural gas."
To reduce its dependence on imported fuel, the government is seeking US$14 billion to build new refineries and modernize the existing nine in operation. Although US pressures may make it very difficult to come up with the entire sum, there are a few willing partners that may ignore or side step this.
In addition to these measures, the Iranian Oil Ministry is encouraging the conversion of cars to run on natural gas, which the Islamic Republic possesses in great amounts.
Iran is also using its global relationships with friendly countries like Venezuela and Indonesia to counter the effects of sanctions and ensure that the flow of petrol would not be stopped.
"There is a race for time in Tehran to prepare the country for the sanctions," said the academic. "Only time will tell if these measures were effective enough or not."

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Kamal Nazer Yasin is the pseudonym of a Iranian journalist reporting for ISN Security Watch from Tehran.