IHS Global Insight Middle East Energy analyst Samuel Ciszuk’s note on energy developments in the region:
Oil Minister Masoud Mir-Kazemi yesterday told Iranian media that domestic gas prices should be hiked tenfold, to help the state save about US$17 billion and boost development of the gas and refined products industry, newswire Reuters reports. The minister said that the Oil Ministry had asked the government to allow it to hike prices in order to stave off a “consumption crisis”.
“To deal with this problem I proposed to increase the price of gas by at least 900-1000 rials [about US$0.1] per cubic metre”, Mir-Kazemi told Iran’s Mehr news agency, adding that this would result in “improved consumption patterns”.
Significance: The latest government budget calls for Iranian fuel subsidies to be radically reined in or scrapped, in order to stave off the continuous spiralling demand growth of gas, electricity, and motor fuels that is forcing Iran to rely on imports to meet domestic demand, despite vast oil and gas resources and large investments in raising its refining capacity in recent years. Iran—like most of its oil-exporting neighbours—has a long history of subsidising refined products and gas very generously, and the practice has become seen as a national right and a way for the population to share in the nation’s natural wealth.
Hence, the political cost of scrapping subsidies is immense and consecutive governments have shied away from it, despite the fact that in the refined products sphere Iran has for decades had to rely on imports at international market levels to fill a domestic refining capacity shortage.
Those expensively bought imports are then soaked up by the domestic market, where consumers—who do not have to pay the commodity’s real value—have developed some of the most wasteful consumption patterns in the world. Having the world’s second-largest gas reserves, Iran has nevertheless for the same reason of spiralling domestic demand had to resort to imports to cover domestic shortfalls during the yearly peak demand seasons.
Meanwhile, the country is struggling to find investors in its refining and gas sector—especially if projects are for domestic supply—as there is virtually no economy in supplying the domestic market for a private enterprise. Radically higher domestic prices could change that, although international sanctions over the years have made sure that even export projects are suffering from an unwillingness to take the political risk involved in investing in—or selling advanced technology to—Iran.
About the author: Samuel Ciszuk is IHS Global Insight Middle East Energy analyst
