Subsidized oil in producing states


in Economics, Politics, The environment

It is widely understood that oil-producing states like Saudi Arabia, Venezuela, and Iran provide huge fuel subsidies to their citizens: selling them oil for a fraction of what it would fetch on the global market. Indeed, Iran is a major importer of gasoline, partly because domestic refineries are only able to produce and sell it at a loss. The most egregious example of all may be electricity in Saudi Arabia, about half of which comes from oil. A 2006 royal decree set the price paid by power plants for oil at 0.46 cents per million BTU: equivalent to $3 per barrel of oil, or $0.07 per gallon. That this is happening while companies are using up huge amounts of natural gas to produce synthetic crude in the Canadian oil sands is a demonstration of how irrational global energy use can be.

Indeed, with oil consumption growing at 5% per year in OPEC countries, between 2004 and 2007, they have actually contributed almost as much to increased global consumption as China has. One estimate holds that continued increases in domestic usage by OPEC states will cut their exports by 2.5 million barrels per day by 2010. That is about a quarter of total American oil use.

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. July 30, 2011 at 10:54 am

Iran’s bold economic reform
Economic jihad
Iran has undertaken reforms that other governments in the region should envy

GOOD news from Iran is rare, and the IMF is seldom a font of happy tidings about anything. So when a mission from the Fund cheered the Islamic Republic’s economy earlier this month, heaping praise on the policies of its ruthless government, eyebrows spiked upwards as in a comic scene in a Persian miniature. The shock was even sharper given that the IMF, whose biggest shareholder happens to be the Great Satan, America, is a pillar of global capitalism, a system that Iran’s maverick president, Mahmoud Ahmadinejad, gleefully lambasts as evil.

Yet the IMF’s upbeat pronouncement, in a brief press release (a fuller report is forthcoming) following annual consultations in Tehran, has some justification. This is not because Iran’s economy is performing brilliantly. Whereas other big oil exporters have boomed on the back of high prices, Iran has grown sluggishly, nudging upwards only last year to 3.5%. That is not enough to dent a rising unemployment rate, which is now close to 15%.

The reason for the praise is Iran’s exemplary execution of a task dear to the IMF’s heart: structural reform. The Islamic Republic describes things differently. Speaking on the occasion of Nowruz, the Iranian new year in March, the supreme leader, Ayatollah Ali Khamenei, declared this to be the “year of economic jihad”. Whatever its name, the sweeping reform of a ruinous, three-decade-old system of state subsidies that Iran began last December seems to be radically reshaping the country’s economy for the better.

. July 30, 2011 at 10:55 am

The government’s first act was to approve a 15% public-sector wage rise proposed in Mr Mubarak’s dying days. It boosted state pensions and gave 450,000 contract workers permanent jobs. The total wage bill could rise 25%. It is not clear the government could afford this. The problem is not just the cost of the bill but the message it sends: the government “comes across as trying to please as many people as possible”, complains Ahmed Galal, the head of the Economic Research Forum, a think-tank.

It has also been inconsistent. It said it would implement a property tax proposed by Mr Mubarak and widely regarded as desirable. It then scrapped the idea under pressure from landowners. It proposed a capital-gains tax on dividend payments and scrapped that, too.

But its worst failure is over what Mr Heikal calls the elephant in the room: fuel subsidies. For years the government has sold every kind of fuel at below—often well below—world market prices, and paid the difference. It also subsidises bread and other staples. The direct costs are soaring (see chart 1): food subsidies now account for 2% of GDP; fuel consumes 8%. In all, subsidies cost almost three times the size of the education budget.

. May 14, 2012 at 7:59 pm

Oil prices
Keeping it to themselves
Gulf states not only pump oil; they burn it, too

EVERYONE knows why oil prices, at around $125 for a barrel of Brent crude, are so high. The long-term trends are meagre supply growth and soaring demand from China and other emerging economies. And in the short term, the market is tight, supplies have been disrupted and Iran is making everyone nervous.

Saudi Arabia, the only OPEC member with enough spare capacity to make up supply shortfalls, is the best hope of keeping the market stable. The Saudis recently reiterated their pledge to keep the market well supplied as American and European Union sanctions hit Iran. Over time, other producers in the Persian Gulf may be able to pump more. Iraq—and Iran itself—have vast oilfields that could eventually provide markets with millions more barrels a day (b/d). All this is conventional wisdom.

Yet these calculations do not take account of the region’s growing thirst for its own oil. Between 2000 and 2010 China increased its consumption of oil more than any other country, by 4.3m b/d, a 90% jump. It now gets through more than 10% of the world’s oil. More surprising is the country that increased its consumption by the second-largest increment: Saudi Arabia, which upped its oil-guzzling by 1.2m b/d. At some 2.8m b/d, it is now the world’s sixth-largest consumer, getting through more than a quarter of its 10m b/d output.

Saudi Arabia is not the only oil-producer that chugs its own wares. The Middle East, home to six OPEC members, saw consumption grow by 56% in the first decade of the century, four times the global growth rate and nearly double the rate in Asia (see map).

. June 8, 2014 at 10:55 am

THE world has a thirst for liquefied natural gas (LNG) and Egypt, with its copious gas reserves, was by now supposed to be helping to slake it. Big foreign companies have invested in gasfields and liquefaction plants but they have been unable to export much because the government, struggling to meet surging domestic demand, has swiped most of the gas.

Thanks to the heavy subsidies to both residential and industrial energy users, demand is growing even faster than Egypt’s already sizeable 85m population. The turmoil during and since the country’s 2011 revolution has killed its tourism trade, wiping out a big source of foreign currency, making it harder for the government to pay foreign firms for the gas it is diverting.

. August 17, 2017 at 10:45 pm

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