Academic journal article Hemispheres

The Impact of Domestic Factors on Iran's Oil Export Capabilities

Academic journal article Hemispheres

The Impact of Domestic Factors on Iran's Oil Export Capabilities

Article excerpt

Introduction

Iran is the oldest and historically second biggest oil exporter in the Middle East. Recently, due to economic sanctions, its position as second OPEC exporter has been challenged by Iraq. According to OPEC data, Iranian oil reserves account for 13% of world proven reserves (the world's third biggest in terms of volume) and gas reserves represent 17% of world gas resources (the second biggest in terms of volume).1 The Oil sector provided the majority of the country's export earnings and government revenue in the last six decades. The importance of the energy sector in Iran's economic development is hard to underestimate. However, it has long been believed that the country's overdependence on oil should be overcome. Economic diversification has been the ultimate goal of development policies before and after the revolution. This goal is still far from being accomplished. Oil is a mixed blessing. Once the resources are depleted the country may no longer be able to sustain its current standard of living. The same may happen in the case of a sharp drop in oil production or export volume, as well as a sudden price decrease. Diversification is therefore a pure economic necessity. The Iranian state dependence on oil is the major cause of the country's high vulnerability regarding recent economic sanctions. Embargoes by some European and Asian states on Iranian oil has pushed Iran into a serious economic crises.

The aim of this paper is not to analyze the impact of international sanctions on Iranian oil export capabilities. I would like to focus on domestic factors only, mainly on domestic oil consumption by raising a question, as to whether or not the increase in domestic oil consumption may threaten Iran's oil export capabilities in terms of both volume and value. Every rise in domestic oil consumption at a higher rate than the increase in total oil production results in lower export volumes and, ceteris paribus, lower export earnings. The research question raised in the paper is not irrelevant. The Iranian population is steadily growing, the country has experienced a steady rise in GDP per capita, which may indicate an increase in domestic oil demand. More importantly, a petroleum rationing system was introduced in 2007, a meaningful fact that provides clear proof of a demand surplus in relation to supply capabilities. Basic trends in Iran's energy consumption, especially oil consumption and production between 2000 and 2012 are examined in light of a search for an answer. As mentioned before, the impact of economic sanctions on Iran's oil production is beyond the scope of this paper, however, the findings provide some conclusions about the vulnerability of the Iranian economy to international sanctions. The data was collected from as many independent sources as possible to deal with the inevitable information credibility problem. The most important statistics were those provided by the Central Bank of the Islamic Republic of Iran, the Iranian Ministry of Petroleum, OPEC, BP and western research institutes, similar to those for example provided by the Economist Intelligence Unit. Recent scientific literature and items of press coverage were among other sources.

The significance of oil for the Iranian state

Before discussing the trends in domestic oil consumption, it may be interesting to briefly introduce the importance of the oil sector for the Iranian economy and especially for the Iranian state, which can be described as one of the 'petro' or rentier states.2 The oil sector generated on average 25% of GDP and 82.3% of total export earnings between 2002 and 2011.3 The average share of oil sector profits in the official government budget accounted for 54.7% in the years 2000-2011. The number more than meets the criterion of being significant4 Figure 1 presents the share of oil income in the official government budget. Data in Figure 1 includes the government share in oil export profit, taxes and dividends from the National Iranian Oil Company (NIOC) as well sums officially withdrawn from the Oil Stabilization Fund for financing budget deficits. …

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