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Thursday, August 24, 2006

Iran economy: Achilles heel


As the prospect of sanctions on Iran over its nuclear activities becomes more likely, the Iranian government maintains that such measures will prove to be double-edged, with the Western powers liable to come off worse owing to their chronic dependence on imported oil. Sanctions, or indeed even the threat of sanctions, will ensure that the oil price remains high, bringing apparent benefits to Iran, assuming that it can continue to export its oil. Oil importers, on the other hand, will confront a price premium that could spike alarmingly in response to any indication that a military confrontation could be in prospect.

However, Iran is by no means immune to economic damage arising from the prolongation of the dispute. The souring of relations with Western powers and political tensions within the Iranian administration have severely hampered progress with development projects, particularly in the oil and gas sector, and the benefits that Iran derives from high oil prices are being eroded by falling crude output and a steadily rising bill for imported petroleum products.

A refinery in every town

The president, Mahmoud Ahmadinejad, has promised to address Iran's petroleum import problems through the construction of a series of new refineries throughout the country. At the same time, his government has warned that imports will be stopped and rationing imposed from September 23rd, when the funds allocated to this purpose for the current fiscal year run out. Neither approach is realistic.

Iran currently produces about 45m litres/day of petroleum products, but needs to import some 25m litres/d to meet demand, which is stoked up by the hugely subsidised price of 9 US cents per litre. A dozen refinery construction projects or upgrades are listed as being under development, but none is likely to be completed in the near future--if at all. Foreign contractors are tending to steer clear of Iran as there is plenty of work in the oil and gas sector elsewhere in the region, and contract terms and financing are becoming increasingly difficult in the country. The government maintains that local contractors are ready to step into the breach, with support from Chinese or Indian firms where necessary. However, it remains doubtful whether the government will be able to come anywhere near meeting it target of doubling refined product output by 2010.

With both rationing and the removal of subsidies carrying major political risks for Mr Ahmadinejad, the only feasible recourse is to divert fresh funds from the oil stabilisation fund (a repository of surplus export revenue) to finance imports.

Crude slippage

The problems in meeting domestic demand for refined products are compounded by the difficulty that Iran is facing in maintaining crude oil output levels. Since the second quarter of calendar 2005, Iran’s oil output has been on a downward trend, according to the latest data released by the International Energy Agency in the July 2006 edition of its Oil Monthly Report. In the three months up to end-June 2005 oil output averaged 3.96m barrels/day (b/d). This fell to 3.81m b/d in the third quarter of 2005. Though recovering slightly in the fourth quarter of 2005, to an average of 3.85m b/d, output declined to 3.81m b/d and then 3.71m b/d respectively in the first and second quarters of 2006.

The average for the three months up to end-June 2006 is the lowest since the second quarter of 2003, when output also averaged 3.71m b/d. The average during the second quarter of 2006 was more than 6% lower than that during the same period of 2005. The chief factor in the low quarterly average was a decline in monthly output in April, which fell to 3.69m b/d, from 3.81m b/d the previous month. This was the lowest monthly average since May 2003. Precise reasons for this downward trend over the past year are unclear, although the comments from the oil minister, Kazem Vaziri-Hamaneh, about a lack of investment suggest that there is a problem in sustaining output even at the comparatively low level of 3.9m b/d, the average in 2005.

Any sanctions imposed on Iran would be most unlikely to include an embargo on oil exports (or indeed on petroleum product imports). However, even without UN sanctions Iran is finding it increasingly hard to manage its energy economy efficiently, and further commercial restrictions would just make matters worse.

Source: ViewsWire Middle East

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