How the fight over Iran’s oil policy could mark the decline in President Ahmadinejad’s career. An analysis by Mariela Zamfirova, MBA.
Iran’s theocratic regime has used its oil revenues to fund an extensive nuclear weapons program. Nonetheless, Iran’s energy sector is strongly dependent on the need to import gasoline to meet domestic demand. Iran does not conceal its ambitions to become superpower in the region. Domestically, President Mahmoud Ahmadinejad, formerly known as a protégé of Ayatollah Ali Khamenei, is now out of favor and on the verge of facing preliminary elections though Khamenei is unlikely to take such a risk bearing in mind the overall instability of the Arab World.
The discord between President Ahmadinejad and the country’s supreme ruler, Ayatollah Ali Khamenei, has resulted in the loss of more grounds by the president and considerable increase in the number of his opponents. Iran’s system allows for two leaders, one divine, and one democratically elected. The supreme leader, Ayatollah Khamenei, holds most of the power levers, controlling the military, the judiciary and the state broadcasting services. The supreme leader is also permanent, while elected presidents serve a maximum of eight years.
Ahmadinejad is destined to follow the fate of his predecessors, who also clashed with the supreme leader and lost the battle. Ayatollah Akbar Hashemi Rafsandjani, president from 1989 to 1997, tried to reform the economy and was in support of human rights in Iran but was overruled by the supreme leader, Ayatollah Seyed Ali Hoseyni Khamenei. He was criticized as too liberal and eventually lost his last public office in March 2011.
In early June Iran’s President Mahmoud Ahmadinejad named a ‘caretaker’ for the oil ministry under strong parliamentary pressure after a row over his decision earlier to personally run this strategic sector. The nomination of Mohammad Aliabadi, a close ally with no known experience in the oil business, can not in any possible way be a solution to the industry’s challenges, which include mounting international sanctions and a growing number of safety accidents. The decision comes after Iran’s parliament voted to submit a complaint to the judiciary against Ahmadinejad, charging that he had illegally declared himself in control of the oil ministry.
Iran’s economy is marked by the reliance on an inefficient state-run oil industry, which provides the majority of government revenues. The recovery of world’s oil prices in the last year increased Iran’s oil export revenue by at least $10 billion over 2009, lessening some of the financial impact of the newest round of international sanctions. The official unemployment rate is 14.6 percent, with the unemployment rate among young people ranging between age 15 and 24 percent. This combined with corruption, power battles and technological backwardness compels Iran’s educated to seek jobs overseas, resulting in a significant ‘brain drain’. The GDP per capita (PPS) in 2010 was $10,600 marking a slight decline against 2009.
The future of Iran’s energy sector is strongly jeopardized by mismanagement via heavy subsidization of gasoline, natural gas, and other products on the domestic energy market. To keep its position, Iran badly needs implementation of modern technologies and massive investments. Iran has been a major oil producer and one of the founding member of the Organization of Petroleum Exporting Countries (OPEC). It has consistently maintained a radical stance at the OPEC’s meetings, demanding production cuts to increase prices as much as possible. Iran has reportedly often deceived OPEC via misreporting its production quota. In 2009 Iran made only half its promised production cuts in an effort to boost its own oil revenues. Iran currently holds the presidency of the OPEC and is the organisations second-largest oil producer. Iran has failed to fully replace European oil investors with Asian ones amid mounting international sanctions over its nuclear program.
The Gulf countries produce nearly 30% of the world’s oil, while holding 57% (715 billion barrels) of the world’s crude oil reserves. Iran alone is estimated to hold 11.1 percent of the world oil reserves (132.0 billion barrels of oil), and 15.3 percent of the world’s natural gas reserves.
According to the Iranian Oil Ministry the country produced an average 4.2 million barrels of oil, 600 million cubic meters of gas, and 400,000 barrels of gas condensate per day in 2010. As per the investment plans in the upstream and downstream sectors of Iran’s oil industry in the period 2011-2016, the daily output of oil will increase to 4.4 million barrels, the output of gas condensate will rise to 1.1 million barrels and the natural gas output to 1.47 billion cubic meters in the next five years.
Iran’s Oil Ministry estimates that the value of Iran’s oil and gas production will rise from $217 billion in 2010 to $350 billion in 2015. In 2011, Iran plans to invest $15.8 billion for the development of the untapped deposits in the South Pars gas field, $4.5 billion for joint oil fields, $3.7 billion for domestic oil fields, and $6.5 billion for other domestic gas fields. The total investment sum in the oil and gas sector will be around $40 billion in!
In a recent statement, Islamic Revolution Guards Corps Commander Mohammad Ali Jafari has said that it is on Iran’s agenda in special circumstances to close the Strait of Hormuz if the country is threatened. The Strait of Hormuz is one of the prime strategic waterways with an average of 15 crude oil tankers passing through every day.
Approximately 20% of the total world oil production pass through the Strait of Hormuz and many economies depend on a continuing flow out of the Persian Gulf. A closure of the Strait of Hormuz would require use of longer alternate routes. Such routes are now limited to a daily capacity of only about five million barrels a day.
Iran’s traditional trade partners on which the future of the country’s oil and gas production depends are China, Japan, India, Russia, and the European Union. Iran relies on them for oil and gas exports, gasoline imports and infrastructural development. Russia supplies nuclear technology, arms and gasoline, and invests in natural gas production.
The U.S. State Department estimates that sanctions against Iran have contributed to the termination of $50 billion to $60 billion in upstream energy investments, a 90 percent drop in gasoline sales between August 2010 and August 2011, a temporary termination of high-value projects and banks cutting their ties to Iran.
The get the most out of the sanctions the world woud have to reduce its dependence on Iranian oil. However, with the turmoil in the Arab World, this goal has become more challenging and Iran has taken advantage to revamp its role of an international bully.
1. CIA: The World Factbook
2. “Iran’s Energy Sector: A Target Vulnerable to Sanctions” Published on February 14, 2011 by Ariel Cohen, Ph.D. , James Phillips and Owen Graham
3. ‘Iran will not restrict itself to closing Hormuz Strait if threatened’ TEHRAN, July 4 (MNA), mehrnews.com