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Backgrounder: Tehran's Oil Disfunction

Council on Foreign Relations

Author: Lionel Beehner, Staff Writer
February 16, 2007

Introduction

Iran’s energy sector is slowly collapsing under the weight of subsidized gas prices and poor development of its aging oil fields, according to a number of Western economists. Despite boasting the world’s second-largest oil reserves after Saudi Arabia, Iran has resorted to rationing its gasoline. As global energy prices slide downward, some analysts predict Iran’s economy, already suffering from UN sanctions, could take a big hit that will have important political ramifications. One economist even predicts Iranian energy exports could dwindle to zero by 2015 without a sufficient influx of outside investment. Iran says it has taken some steps to spur investment, such as striking energy deals with countries like Pakistan and China, but it has proven unwilling to cut gas subsidies and curb its domestic appetite for energy.

How important is energy to Iran’s economy?

Sales of oil and natural gas account for the bulk—between two-thirds and three-quarters—of Iran’s government income and make up roughly 80 percent of its exports. Ten percent of the world’s proven oil reserves lie in Iran. But as production (around four million barrels per day) has slid in recent years, supply has not caught up to demand. Spurred on by artificially low energy prices, Iranians are among the world’s largest consumers of gasoline. The population of sixty-eight million, which has doubled since 1979, is growing by around five hundred thousand annually, meaning for the foreseeable future production is unlikely to keep pace with domestic energy demands. Thus, Iran, despite its vast reserves, must import roughly one-third of its petroleum. The International Energy Agency estimates $165 billion in investment will be required for Iran to meet its energy production goals set for 2030.

Read the rest of this article on the cfr.org website.

Copyright 2007 by the Council on Foreign Relations. This material is republished on GlobalSecurity.org with specific permission from the cfr.org. Reprint and republication queries for this article should be directed to cfr.org.