| Iran under energy crisis:
Rising gasoline imports, gas shortages and the nuclear stand-off
By
Centre for Global Energy Studies (CGES )
Posted: 21 May 2007
 Send this article
 Print this article
The energy sector in the Islamic Republic of Iran is in crisis. In spite of holding the world’s second largest reserves of conventional oil and natural gas, the country needs to import almost 200,000 barrels per day of gasoline and lesser quantities of gasoil, has experienced winter shortages of natural gas in the last few years and is said to be suffering from a declining annual crude oil production of up to 500,000 barrels per day. Iran is also pursuing nuclear technology for electricity generation, yet is accused by the United States and others of pursuing nuclear weapons capability and the UN Security Council has imposed sanctions on Iran . It is feared that this dispute could lead to military conflict and possible disruption of oil supplies from Iran and the Middle East , with potentially dramatic consequences for the world oil market and the global politico-economic system. These topics are analysed in this new study just released by the CGES. The conclusions of the study are briefly summarised below:
Decline in crude oil production capacity
Iran ’s ability to produce oil is not likely to be impaired because of any inherent natural decline due to physical exhaustion of the country’s oil reserves. Such a decline may not occur for some years, provided Iran ’s exploration and production operations are carefully planned, adequately funded and professionally implemented. However, Iran ’s oil production could be affected adversely by misguided policies, changing governments and political uncertainties rather than a lack of adequate oil reserves.
Imports of petroleum products
Oil consumption in Iran has been rising rapidly - especially of gasoline, but also of gasoil - and Iranian refineries have not been able to keep up with the growing demand, forcing Iran to spend $5-6 billion per year on importing petroleum products. This is a heavy burden for the Iranian government. Domestic prices for petroleum product and other energies are very low and heavily subsidised. This has resulted in strong growth in Iran ’s internal fuel consumption through wastage, misuse and the smuggling of petroleum products out of the country. The country’s overall energy subsidies have been estimated at more than $20 billion per year.
Iran has major plans for upgrading the country’s existing refineries and building new ones, as well as expectations for a moderation of the growth of domestic consumption. However, the plans appear ambitious and consumption cannot be curtailed without increasing prices. It seems that the price of gasoline and other fuels will be increased gradually. Intelligent (smart) cards for vehicles have been introduced and different prices will be charged for different groups of users and of vehicle types under a new rationing scheme.
Electricity demand and Iran ’s natural gas
About three quarters of Iran ’s electricity is generated using natural gas. This usage is rising rapidly, but gas consumption is also expected to continue to grow at very high rates in the residential, commercial and industrial sectors. Increasing quantities of gas are also expected to be injected into Iran ’s ageing oil fields and used in the expanding petrochemical industry and for Iran ’s ambitious gas export plans. Iran has been too successful over the last three decades in rapidly increasing its production of natural gas, reducing the flaring of associated gas, expanding gas use and substituting natural gas for oil. However, as with oil, the price of gas is too low, leading to rapid consumption growth and Iran has been finding it increasingly difficult to boost gas production to meet soaring demand. Shortages have occurred during recent winters. Computations show that in spite of the huge reserves, the very high annual increase (more than 15% in some years) in gas production is untenable.
However, with price reforms and a re-evaluation of the gas grid’s expansion plans, Iran ’s domestic gas consumption growth is likely to slow down in the coming years and it is probable that not every individual Iranian oil field will be injected with natural gas. Similarly, not all of Iran ’s gas export plans may materialise at the same time, while the eventual advent of nuclear power - despite its present difficulties - will slow the growing use of gas for electricity generation. Iran need not face shortages of natural gas, if it plans and manages its gas resources properly.
The standoff over Iran ’s nuclear ambitions
As in other developing countries, Iran ’s need for electricity is growing faster than its GDP. Iran has successfully cut back its use of petroleum products in electricity generation and has substituted them with natural gas. However, Iran is finding it difficult to produce enough natural gas to meet all its needs. On the assumption that these trends will continue, one could argue that Iran should evaluate other options for the generation of electricity and nuclear energy is obviously one such option; it is well-established in many countries and Iran naturally aspires to have access to this technology. However, about two decades are needed for establishing domestic know-how, infrastructure, the requisite nuclear fuel cycle and the generating capacity, which is why the Iranian authorities say they now need to proceed down the nuclear path so as to have a smooth-running nuclear industry by the time the country has to rely on it for its power supply.
Iran ’s pursuit of the nuclear option, though, has led to a standoff between Iran and the US and some other countries. For most Iranians the nuclear power is an emotive national issue. They believe that Iran should be free to pursue nuclear energy for peaceful purposes under the supervision of the International Atomic Energy Agency. Iranians resent what they think is unfair pressure being placed on them to end the processing of nuclear fuel, which is a necessary part of the nuclear power cycle. On the other hand, the UN Security Council has passed resolutions imposing sanctions on Iran , leaving alive the possibility of armed conflict between Iran and the United States . A military clash with Iran could lead to a disruption of oil supplies from the region with serious implications for the global oil market, and much else, for that matter. In these circumstances, the price of oil may well soar to levels well in excess of $100 per barrel.
Iran and the US have had no diplomatic relations since the Tehran hostage crisis of 1979 and - much worse - any serious contact between the two sides has become a taboo subject in both countries, with pressure groups and strong lobbies pushing the two sides further apart. However, following an analysis of the political structure and decision-making process in the Islamic Republic, the tragic consequences of a military conflict for all parties concerned, public opinion and the role of various political activists in the US, Europe, Iran and other countries, as well as considering present conditions in the Middle East, the CGES has concluded that a peaceful, face-saving compromise solution will in due course be found for Iran’s nuclear dispute. Military conflict is considered unlikely, although of course nothing can be entirely ruled out. |
