Recently, Iran’s National Development Fund delivered a surprising projection: within the next decade, the country’s oil production and consumption may converge.
The alarming implication is that, with increasing consumption and declining production, Iran might face challenges in exporting its oil, a significant concern for an economy heavily reliant on oil revenues.
This news is particularly startling given that Iran possesses 9% of the world’s oil reserves and 17% of global gas reserves.
Currently, Iran stands at a critical juncture concerning its energy future. Adding to the complexity, Iran has grappled with a gas crisis before, raising concerns that history may repeat itself.
This predicament poses the most significant threat to government revenue streams, impacting institutions such as the National Development Fund and the National Oil Company.
When a government loses a pivotal income source, the ensuing budget deficit places additional financial strain on the populace.
In the early 2010, when oil prices reached their zenith, Iran experienced a surge in income, significantly elevating levels of welfare and household consumption. Taxation, as it is known today, was not a prominent feature during that period.
The prosperity and increased consumption were a direct result of selling oil at exceptionally high prices, allowing the country to boost consumption without a corresponding increase in real productivity.
The unique attribute of oil, which enables selling more than the labor invested, explains its substantial impact on welfare. Essentially, Iran managed part of its expenditures by liquidating assets and national capital.
However, it now appears as though those assets have dwindled, creating a precarious financial situation. In the ‘90s, when Iran’s population was 70 million, each barrel of oil was valued at $10.
The operational cost of oil production remained the same, resulting in minimal differences. Consider selling a barrel of oil to India for $10 and importing a bag of rice in return.
Over time, as oil prices surged, each barrel was exported for $140 in 2012, allowing Iran to import 14 bags of rice in return.
This translated to a 14-fold increase in consumption and welfare for Iranians without a proportional increase in real productivity.
This phenomenon played a pivotal role in stabilizing the exchange rate during those years. Oil revenue clandestinely entered the economy, maintaining the value of the rial with oil dollars.
The stability of prices, increased public welfare, managed inflation expectations, heightened investment, reduced speculation, and the redirection of capital from non-productive to productive sectors were direct outcomes of preserving the national currency’s value and reducing the exchange rate.
However, returning to the peak days of the early 2000s, despite the sanctions and dwindling oil production, is now nothing more than a distant dream.
With the current population increase of 15 million people and oil prices fluctuating between $60 and $80, even if prices were to reach $140, the additional population would neutralize the impact, making it challenging to replicate the prosperity of those years.
Moreover, global economic uncertainties and a decline in oil production further restrict the influx of oil dollars into the government treasury.
This potentially stimulates an increase in energy prices domestically, resulting in inflationary pressures, heightened taxation, and reduced chances for foreign investment.
Energy price fluctuations alter the relative advantage and profitability of different industries annually, introducing instability and multi-rate fuel prices.
In addition to economic infrastructure challenges, this scenario creates a high-risk, mandated market that loses value with each government directive. Such an environment is less attractive to foreign investors, perpetuating a cycle with interdependent challenges.
The potential remedy lies in boosting the GDP, beginning with the removal of sanctions and global market integration. The introduction of non-oil dollars resulting from free trade could disrupt the existing equations, offering a potential way out of this economic impasse.
