IRAN - The Energy Base.

Energy consumption in Iran has more than tripled since the Khomeini theocracy came to power in early 1979. In calendar 2004, it reached 132m tons of oil equivalent, compared to 72.2m tons oe in 1991, with oil accounting for less than 41% compared to more than 67% in 1991 thanks to a continuing shift to natural gas. In calendar 2006, energy consumption reached 149m tons oe. The rise has been helped by a rapid population increase and heavy subsidisation of fuels, costing the nation billions of dollars per annum.

Successive governments since 1989 have managed to boost the use of natural gas at the expense of oil. About $34 bn were spent in three five-year development plans - from March 21, 1989 to March 20, 2004 - in projects to switch from oil to gas and to cover the cost of energy imports. The state has spent another $15 bn from then to the end of the last Iranian year to March 20, 2007.

Iran's population has risen from 35m in 1979 to almost 70m, despite successful birth control measures introduced in the 1990s. The dependency ratio is over 70 per 100, and those aged 60 and above exceed 6m. In addition, there are over 4m Iranians living abroad. Fast population growth over the past 28 years is one reason why Iran is among the poorest OPEC members in per capita terms. The economic situation has improved, however, thanks to high oil prices since the spring of 1999 and the country has come out of recession (see background in Vol. 56, No. 13).

The Domestic Market: Iran's energy mix consists of oil, natural gas, coal and hydro-power. The government's top priority is to free up more of its oil production for exports. Oil consumption now averages about 1.5 b/d, up from a previous peak of 1.248m b/d in 1996, with the shift to natural gas having failed to lower local oil demand. There have been cuts in the subsidy on refined oil products every year since March 1995.

High consumption of gasoline, still among the cheapest in the world, remains a burden on the state as in the case of gasoil, diesel, kerosine and other fuels. Gasoline consumption has risen by 10% over the past calendar year. Iran now imports over 180,000 b/d of gasoline, up from 100,000 b/d in 2004, a burden costing the state billions of dollars a year, up from 30,000 b/d in 1999.

A major gasoline shortfall has hurt state finances as the government pays world prices for imported gasoline sold in Iran at heavily subsidised prices. The Majlis (parliament) is now considering a bill to raise the price of gasoline from $0.09/litre to $0.16. The subsidy in Iran's fiscal year which ended on March 20, 2007, is likely to have cost the government $13.5 bn.

The state-owned National Iranian Oil Co. (NIOC) on Dec. 18, 2006, said the national consumption of gasoil in previous weeks had reached a record high of 100.1m litres/day. According to NIOC's official statistics, consumption touched 71.257m litres/day on average. Cold weather had caused the sharp rise in household use and, consequently, gasoil consumption in power plants.

Parliament on March 7, 2007, set May 22 as the day when the country's 15m motorists lose access to unlimited cheap fuel. Pump prices of gasoline, frozen for three years at 80 tomans (9 US cents) a litre, have boosted consumption far beyond the capacity of Iran's oil refineries and meant that 40% of gasoline has had to be imported. With Iran facing further UN sanctions over its nuclear and missile programmes, politicians have opted to dampen demand by a combination of rationing and higher prices.

Parliament on March 7 decided to limit annual gasoline subsidies to $2.5 bn, and news wires reported the new rationed price will be 100 tomans (11 US cents) a litre, with extra fuel sold at a higher price. MPs left the government to decide by April 20 on the ration quantity, the price of un-rationed gasoline, and the method of rationing, likely to be the use of "smart cards".

The price of gasoline is politically sensitive. Many run cars as unofficial taxis to supplement low incomes or survive unemployment. Basics like bread, electricity, gasoline, natural gas and medicines are subsidised. Iranians see cheap gasoline as a birth-right.

MP Mahmoud Abtahi was on March 9 quoted as warning a 25% price rise would bring a "severe shock because gasoline is the life blood of the economy" and urged parliament to support low-income groups. But Heydar Pourian, editor of Iran Economics, a leading business monthly, said a 25% hike was psychologically bearable and not much above inflation, adding: "What else can you buy for 100 tomans? The decision makers are being cautious". Sarmayeh, a business newspaper which backs market reforms, said gasoline prices should be closer to cost, and that this would increase inflation by only 2 or 3% in the first year, adding: "People would then deal with the situation more rationally in years to come".

Successive governments have been tardy in opening up the economy to competition. Heavy dependence on oil, capital flight and state direction have all hampered the private sector. An IMF report in March said any success in Iran's much delayed privatisation depended "on reforms to improve the business climate". Iran's state-owned domestic car makers, protected by high import barriers and being a powerful lobby, are expected to produce over 1m new models in the current year.

Western political and economic pressure has chilled foreign investment in Iran and is squeezing the long-fragile energy industry, a problem in many ways at the heart of Tehran's nuclear controversy. The squeeze comes as consumption is booming, adding strains to a government burdened by sanctions and wary of discontent. Foreign investors, who have helped oil development in Iran, have been scarce since the Islamic revolution in 1979, and the petroleum industry has suffered decades of economic, political and technical problems.

Iran has signed no firm oil or natural gas contracts with foreign E&P investors since June 24, 2005, when Mahmoud Ahmadi-Nejad was elected president and began flaunting Iranian nuclear ambitions and renewing tensions with the West. Iran, one of the world's largest oil exporters, sits on the second largest oil and gas reserves. But it has struggled to keep oil output from falling in recent years. Each year, it has to make up for production declines of 400,000-500,000 b/d.

In calendar 2005 Iran produced 87 BCM of natural gas and consumed 88.5 BCM. A significant portion of Iran's gas output is used for reinjection into mature oilfields in order to prolong their productive life, with the remainder sold to homes, industries and power plants at heavily subsidised prices. The domestic tariff is about $9 per 1,000 CM, equivalent to $0.25/m BTU.

Analysts say if the acute imbalance between energy production and demand at home continues unchecked, Iran will have no oil left over to export within a decade. Iran holds 11% of the world's oil reserves, second only to Saudi Arabia. Its oil exports, totalling $47 bn in 2006, account for half of government revenue.

The New York Times on Feb. 12 quoted Robert Murphy, an analyst at Washington consulting firm PFC Energy, as saying: "They have a perfect storm of problems feeding into each other". He estimated that Iran might have no more oil left to export by about 2015 if it did not rein in runaway consumption and reverse the long-term decline in its oil production. He said: "The domestic energy situation is as big as the international issue, and feeds into it in a very significant way", referring to the controversy about the Iranian nuclear programme.

Iranian leaders say they want to develop nuclear power to free petroleum resources for domestic use or export. The US and other Western powers believe Iran is using the programme as a front for building atomic weapons.

On March 24, the UN Security Council (UNSC) unanimously voted to impose economic sanctions against Iran until it halted its nuclear programme. These were in addition to UNSC sanctions adopted on Dec. 23, 2006.