Numerous factors have been attributed to the rising oil prices in recent days. Exceeding $55 per barrel, the prices are way higher than the average rate in the past five years.
High demand particularly in developing countries such as China, India and Southeastern Asian countries, which have been experiencing rapid economic growth in the recent years, are some of the reasons behind the price rise.
China’s refining capacity, for example, rose by 17 percent last year, while in India diesel consumption increased by an average 10 percent.
International agencies predict demand for oil is set to rise by an annual average of 1.5 percent for the time to come.
Other factors are cited as political instabilities in both producer and consumer countries especially in the oil-rich Middle East (Iraq, Palestine, Saudi Arabia and Iran-US relations), suppliers’ limited production capacity, threat of terrorism, recent scandals at major Russian oil companies, ethnic conflicts in NigeriaÉ., etc.
Suppliers are exploiting their output capacity in excess and for the first time in the oil industry’s history, spare production capacity is way lower than demand (nearly 2 million barrels). As a result, the Organization of Petroleum Exporting Countries (OPEC) is unlikely to keep up with the fast growing demand because of numerous and prolonged processes involved from the time oil is discovered till it comes out as the final product.
The situation will be the same unless new resources are discovered and production stages expedited.

Investing in up-stream industries will sooner or later cause a surge in production and reduce prices.

Oil Leverage
Oil is a political commodity often used as leverage by governments to sway the course of action in international interactions to their favor.
The strategic reliance of the West and countries such as Japan, China and the US on oil is why there are more reasons than just the market factor influencing the rate.
Political manipulations and market interventions especially by big powers, the US in particular, hugely contributes to price fluctuations.
The US, directly or indirectly, shares a huge portion of the Middle East oil resources whether be in Iraq (a country that has the world’s second largest oil and gas reserves) or Kuwait, the UAE and Saudi Arabia where it has great interests in their oil and gas sectors.
Naturally, Washington cannot remain indifferent towards oil market developments.
Unprecedented high prices have and will continue to cause an inrush of petrodollars into producer countries. The best way to spend the windfall fortune would be on new procurements to upgrade their technological know-how and disbursing a good enough portion of domestic funds to oil and gas projects.
Rising prices and shortage of spare oil will also trigger an inflow of cash for discovering and exploiting new resources considered up to now as being uneconomic. These could include offshore reserves located in extremely low sea depths as well as resources containing heavy crude.
Experts say an increase in global production level from the current daily average of 82 million barrels to near 121 million barrels by 2025 will require $6,000 billion.
Such estimates are based on the fact that in the absence of other energies, demand for oil and oil derivatives as fuel and also for production of industrial commodities will continue to rise for the next 30 years.

Hike in oil prices fetched Iran an extra $14 billion in the year ending March 20.

Ambitions
Iran, the second largest producer in OPEC, has set itself the target of doubling oil production within the next 10 years in order to keep a grip on its share of a rapidly expanding market, analysts say.
The country, which hosted a key meeting of the organization in the city of Isfahan, currently boasts oil production capacity of 4.2 million barrels per day (bpd) but knows this figure cannot remain stagnant.
Iran wants to increase current production levels in the next five years to 5.4 million bpd and then by 2 million bpd more in the following five years, so that it would be pumping out 7.4 million bpd in 2015.
However to reach the targets, Iran will need to invest $10 billion each year for the next decade but is already two years behind schedule.
The country’s problem is attracting contractors for its projects. If it gets $70 billion of investments over the next 10 years it will be a success.
Iran has still not reached the objective of producing 5 million bpd set out in the country’s third five-year plan, (ended March 20), according to Mohammad-Ali Khatibi, head of OPEC research at the International Energy Research Institute.
However Iran’s ambitions are being helped by the high price of oil, currently trading at well over 50 a barrel. Khatibi said that Tehran supports a mean price of 35 a barrel, while other experts put the figure at 40.
The hike in oil prices has allowed Iran to harvest 14 billion more in revenue from oil for its budget than its forecasts had predicted.
Basing its forecasts on an oil price of 19 dollars a barrel, Iran was expecting 16 billion of revenues for its current budget. But Oil Minister Bijman Namdar Zanghaneh has said oil revenues for this year are $30 billion.
Recent discoveries have allowed Iran to overtake Iraq to register as OPEC’s second largest reserves. According to the latest statistics, Iran has over 137 billion barrels of reserves.
But despite the rosy figures, the country still faces challenges.
As the fields of non-OPEC countries progressively become exhausted, OPEC’s market share is going to increase considerably in the next 30 years to reach 60 percent of world production. Iran will have to make a double effort to prevent loss of its market share.
The US sanctions and tensions in relations can only delay Iran’s oil projects, even though they will not be stopped.
For the next Iranian calendar year (March 2005-2006) the government has forecast 16.1 billion of receipts from oil. Any surplus will be put into foreign currency reserves for development projects or paying off external debt.
If prices stay at their current levels, Iran will have a windfall of more than 15 billion of additional oil income.

Iran has set the target of doubling oil production within the next 10 years.

Investments
The Iranian government says it plans to invest nearly $100 billion, during the next decade, to further develop its down and up-stream oil and gas industries so as to be able to maintain its current production level and also to raise it by two million barrels by the next five years and by four million barrels by the next decade; for which it needs ample money.
Oil is the lifeblood of the Iranian economy. Having the world’s second largest oil reserves, Iran can be one of the top choices for investments.
The government should in the meantime be prepared for bitter rivalry that is emerging among producers for attracting more investors.
Multinational oil companies prefer low-risk regions because they guarantee them with swift capital return and short as well as long-term profits.
Cash and technology are two most important advantages the country can gain through foreign direct investments in the short run.
In the longer term, low production costs and proximity with major markets will make investments in Iran appealing for foreigners, an example of which would be the recent agreement with Japan for development of Azedagen oilfield.
Investing in the up-stream industries will sooner or later cause a surge in production and reduce the prices. Therefore, the government should in addition to ensuring that enough money comes in for boosting production, prepare itself for a possible reduction in prices by employing mechanisms to generate wealth aside from oil revenues.
The fact is that Iran might not be the best option for potential investors as it is located in one of the most volatile regions of the world.
The best strategy, when considering all the facts, is to utilize the extra money the government has earned out of record high oil prices to improve domestic potentials such as engineering and construction capabilities of local manpower. This would enable handing over of major projects such as development of oil and gas fields as well as establishment and renovation of refineries to domestic private firms.
This, of course, requires the government’s full-fledged political and financial support.

The Seventh Majlis recently decided to trim down non-productive costs of companies by 40,000 billion rials. Managing director of the office for agency affairs and privatization at the Management and Planning Organization, Hassan Khoshpour, claims the cost-increase of state-run companies “is a direct result of increase in their productivity.“ The costs classified under the title of non-productive expenditures are also related to production and company activities, he says.
In an interview with Persian weekly Barnameh, Khoshpour says for this reason alone, the Majlis Joint Commission decision to trim by such a huge amount non-productive costs could have adverse consequences on the profitability of state-run companies or even incur them huge losses.
The plan has not been implemented yet.
Following are excerpts of the interview:
Please explain the new changes in company budgets proposed by the Majlis Joint Commission.
The most important change as per the decision of the commission has been reduction of 40,000 billion rials in non-productive costs of state-run companies. As a result, their profits should increase by the same amount. The commission also decided to increase tax for the state-run companies by 10,000 billion rials.

What are the mechanisms for reducing costs and raising profits?
The commission did not state any mechanism, but only to reduce non-productive costs in the allocated budgets of 507 companies. How this amount is to be juggled among them is indeed a fundamental challenge per se.

Is it feasible to increase profits while considering such a reduction?
As the parliament put it, since the costs are non-productive, even if they are reduced it would not harm production or have any adverse impact on it. On the contrary, this is considered to be some kind of savings. However, it needs to be said that the costs of state-run companies are in no way similar to that of other organizations. Company’s income depends on its productive and non-productive costs. Production costs comprise raw materials, wages and other expenditures. Non-production costs comprise administrative costs in support of production, distribution and sales. Distribution and sales costs are part of the product life cycle, mainly production, distribution and product services, and if reduced it could have an adverse impact on the overall performance of the company. It is therefore wrong to assume that with the reduction of 40,000 billion rials there will be no changes in the production level of companies.

How much does this amount constitute in company budgets and what impact will it have in general?
The total amount of non-productive costs for all companies stands at 11,630 billion rials, of which 10,640 billion rials are related to profit-making companies and the rest to loss-making ones. The Management and Planning Organization pays loss-making companies some 2,489 billion rials as compensation. Therefore, it is not possible to reduce such amounts only from profit-making companies. Profit-making companies have 106,400 billion rials allocated for non-productive costs. The 40,000 billion rials figure is almost 40 percent of all non-productive costs, mainly distribution, sales, administration and other costs that companies are bound to pay the government.
In 2004, the ratio of profit to income was 10.3 percent for profit-making companies. In the 2005 bill, this ratio increased to 12.4 percent. With the decision of the Joint Commission, the ratio of profit to income will reach 19 percent for profit-making companies. With regard to the nature of state-run companies and their role in the economy, a 7-percent raise in their profitability within a year is almost impossible.

What is the main reason behind parliament’s decision?
Parliament decided that company costs were high but it is still possible to justify it in other ways. Some are in fact not company costs but payments in different situations which cannot be avoided. It is very hard to take decisions when it comes to reduction of costs. The type of activities and the financial structure of all the companies are not similar. The only way to curtail non-productive costs is to find proper ways to increase savings, which has not happened yet. In fact state-run companies are not like organizations and ministries in which it is possible to reduce costs by transferring credits. In state firms, production, distribution and income are dependent and related to the costs. Any reduction in such costs would mean reduction in operation, production, income and other parameters.

Why are non-productive costs of profit-making companies higher?
They have higher budget allocations. The production costs of such companies would be around 575,000 billion rials and in return their non-productive costs would be 116,000 billion rials, which is lower. A great portion of such non-productive costs is related to profit-making companies. At the moment profit-making companies comprise 92 percent of the total budget and only 8 percent goes to loss-making companies.

State-run institutions and ministries are not supervised the way state-run companies are. Why this difference?
Because of technical reasons and methods such as supervision is different. State-run companies are supervised and checked by the Audits Court and government inspectors. This evaluation process is carried out every year and is followed by an annual report.