Top Crude Oil Exports, 2006

Western policy toward Iran relies heavily on economic pressure, and Iran’s political trajectory is shaped in large part by its economic prospects and constraints. According to Usip.org, The Iran Policy Forum at the United States Institute of Peace (USIPeace) convened a meeting to discuss the status of Iran’s economy and energy sector; the effect of Iran’s uncertain political climate and concerns over its nuclear program on the economy; and actions the government should take to avoid future economic troubles. This USIPeace Briefing summarizes the discussion:

Macroeconomic Performance
Iran’s economy suffers from myriad problems, but it has not yet reached the point of crisis. In fact, the belief that Iran suffers from dire economic conditions is one of four myths circulating about Iran’s macroeconomic performance.
Iran’s economy has actually performed well in aggregate terms, with a moderate rate of growth in the last ten to fifteen years, including healthy GDP and per capita growth in investment. In the last three years, Iran’s actual growth rate has averaged 5.8 percent.
Nor do economic indicators support assertions by some observers that inflation is much higher than the rate stated by the Iranian government. In the last fifteen years, the consumer price index (CPI) has increased by a factor of forty-two; if the inflation rate were actually twice the reported rate, the CPI would have increased by a factor of 950.
Prices have increased by a factor of five in the last ten years, not twenty, as some claim. While this rate of inflation is cause for concern, it is in line with the depreciation of the exchange rate.
The third myth is that Iran suffers from widespread poverty and rising inequality. The poverty rate actually declined throughout the 1990s and continues to fall, and is low by international standards--especially when compared to that of other developing countries. Government public service and social assistance programs have helped to reduce poverty, particularly in rural areas. In addition, economic inequality throughout Iran has remained fairly stable and does not appear to be increasing.
The final myth is that unemployment in Iran is twice the official rate. Although the unemployment rate is high, it has declined since 2000 and reached 11.2 percent in 2004.
While official statistics match World Bank estimates, the current government has failed to generate sufficient job growth to meet the needs of Iran’s young, educated population. For these youth, unemployment often lasts two to three years, which has resulted in more young Iranians living with their parents well into their twenties.
It is estimated that every year between 700,000 and one million people enter a job market that creates only 300,000 to 500,000 decent jobs for them The high unemployment rate, combined with the current youth bulge, puts significant pressure on Iran’s economy and government.
Iran is experiencing growth in the non-energy areas of its economy, particularly in the manufacturing, agricultural, and service sectors. However, the government has not taken the steps needed to diversify its economy by producing consumable goods for export.
Iran has the infrastructure and educated population it needs to succeed economically, but the country must resolve its political problems and implement economic reforms. This includes increasing transparency and easing government pressure on certain private sectors of the economy, such as private banks.

Oil Production & Consumption, 1976-2006E

Energy Sector
Iran’s crude oil production appears to be declining, which stems from three broad factors: poor maintenance of current crude fields and a lack of new project development; rising domestic demand and consumption; and Iran’s political and investment climate.
Most of Iran’s oil comes from six aging crude fields. Although their recoverable reserve estimates are high, the fields are not well maintained. The National Iranian Oil Company (NIOC) does not have the necessary capabilities or access to the necessary technology or financing it needs for proper field maintenance.
NIOC lacks the information on the fields necessary to create an effective production maintenance strategy. Despite its desire to handle Iran’s crude fields on its own, NIOC is beginning to struggle with properly maintaining them and with developing new exploration and exploitation projects, primarily because of constraints placed on the company’s finances.
Such problems with NIOC have limited the development of new energy projects in Iran by international oil companies (IOCs) and national oil companies (NOCs). These companies possess the capital and technology needed to fund and carry out new exploration and exploitation projects, which are keys to maintaining production.
Iran has a substantial supply of natural gas. The gas can be used for re-injection, a process by which it is used to pressurize the oil wells to ease extraction and stimulate crude production, thus increasing revenue. However, there is currently a debate within Iran about whether re-injection is the best use of its gas resources; they could also be exported in the form of liquefied natural gas, which would also generate revenue.
Alternatively, Iran could use natural gas to meet its growing domestic energy needs. This would require advanced technology and funding, and the investment of IOCs, both of which Iran currently lacks.

Rising Domestic Demand
Iran’s domestic energy demands and consumption have increased significantly, and will continue to rise. While this is in part an unavoidable result of Iran’s developing economy, rising demand also stems from fuel subsidies from the government.
These subsidies cost Iran about ten percent of its GDP annually, which leads to inefficiency and drives consumption. The NIOC receives only a fraction of this amount in investment. Rising consumption has increased the amount of gasoline that Iran imports and has increased pollution, especially in Tehran.

Political/Investment Climate
Although Iran is one of a few oil-rich states open to investment by IOCs and NOCs, the current political climate limits the amount of foreign investment in Iran’s energy sector. Additional sanctions placed on Iran could prevent future investment by IOCs.
Iran’s buyback system of project funding also impedes investment by imposing additional constraints on foreign companies and lengthening the duration of project negotiations. Iran has discussed reforming this system to make it more attractive and encourage companies to invest in exploration.
Actions by Iran’s government also hinder development of the energy sector. Government spending is rising, and Iran needs oil prices to be high in order to break even. The government is also dipping heavily into the Oil Stabilization Fund (OSF), which is supposed to be set aside as a reserve fund. Spending this money, combined with Iran’s declining production, could have extremely negative repercussions on the economy should oil prices fall suddenly.
Future Implications
Iran’s economic and political future will depend on at least three factors: the willingness of foreign entities to invest in Iran; the manner in which the nuclear issue is resolved; and the government’s ability and willingness to implement needed economic reforms.
As Iran’s oil fields remain open, foreign governments and companies will continue to pursue investment opportunities. However, much of Iran’s future successes in the energy sector will depend on its ability to fund new projects.
Iran needs to reinvest an estimated $9 billion to $10 billion in its energy sector every year to maintain current output, but it currently allocates only a third of that amount. Iran also lacks sufficient foreign direct investment for economic growth. There is some concern about capital flight from Iran to Dubai, but one speaker indicated those fears are exaggerated, as such flight has not affected Iran’s exchange rate.
Iran needs to reduce welfare spending and its reliance on energy revenues and reform its domestic energy sector to enhance the efficiency of NIOC. The government also needs to increase economic growth in non-energy sectors, since Iran’s energy industry brings in 80 to 90 percent of export revenues--a large gap for other industries to fill if Iran’s crude production continues to decline or if oil prices fall.

It is surely in their own interest for American multinationals to call on US Congress to reject protectionism against China. But this self-interest does not lessen the importance of their argument.
Instead, their move underscores the urgency to curb rising protectionism among some US lawmakers that seriously threatens the interests of China, the United States itself and the world at large, reported Chinaview.cn.
On September 26, a total of 119 US companies and 35 industry associations signed a letter to urge the US Congress to reject legislation to force China to raise the value of its currency.
Two US Senate committees have already approved different bills on this topic. One will allow tariffs on Chinese imports to increase after a formal finding that the yuan is undervalued. The other tightens the US definition of currency manipulation to make it harder for the Treasury Department to avoid making that finding on China.
These protectionist legislations largely stem from the misguided view of some US lawmakers and manufacturers that China has undervalued its currency to secure a significant price advantage in international trade.
Given the ballooning US trade deficit in recent years, it is tempting for some US politicians to play up to the talk of protectionism that could easily provoke national passions.
In addition, it is also a matter of fact that, while yielding widely shared benefits, free trade in the era of accelerated globalization has imposed extra burdens on local enterprises including some US manufacturers.
Yet, these facts do not justify protectionism that flies in the face of the big picture that tremendous benefits have arisen out of openness in foreign trade and investment.
Any trade barrier erected between the world’s two major growth engines will only hurt the global growth prospect against the interest of all.
Both countries have accounted for more than 40 percent of total global economic growth in the past five years, and they are critically important markets for each other.
Despite the massive trade surplus for China, a close look at its exports will reveal that it is foreign companies, including many US multinationals that drive the majority of China’s exports. Moreover, the Chinese market is much more open to foreign products than some have assumed.
The rate of increase in US sales to China has been 12 times higher than the growth of American exports to other countries during the same period, according to the US Commerce Department.
Clearly, complementary trade relations between China and the United States have benefited and will continue to benefit both consumers and producers within and beyond the two countries.

Dominique Strauss-Kahn has pledged to revitalize the fund’s development efforts as IMF managing director.
As reported by Ipsnews.net, Africa Action and 100-plus other pressure groups, in a letter to the former socialist finance minister from France, demand decisive action within the first 100 days of his five-year term, due to start November 1.
“If Mr. Strauss-Khan is serious about IMF reform, these issues must be at the top of his agenda,“ said Marie Clarke Brill, interim executive director at Washington-based Africa Action.
The letter urges four policy changes. Obstacles to increased spending on health and education must be removed and more expansive fiscal and monetary policy options should be adopted, it says. Additionally, debt cancellation must be immediate and budget and wage bill ceilings that undermine poor countries’ ability to provide adequate salaries for health and education workers must be rescinded.
The fund “commits to some changes, including increased fiscal and monetary flexibility with an overarching purpose of maintaining macroeconomic stability,“ the October 1 letter by the critics acknowledges. “The IMF does not address either the parameters of alternative policies or how ’stability’ will be defined.“
The groups’ demands echo a March report by the IMF’s own Independent Evaluation Office (IEO) and the findings of a June report from the Center for Global Development (CGD), a Washington think tank made up of former insiders from international financial and aid institutions.
At issue are the policy conditions under which the fund disburses money from its concessional Poverty Reduction and Growth Facility, formerly the Enhanced Structural Adjustment Facility, to some 29 low-income countries in Africa south of the Sahara Desert.
The IEO, in its March report, noted “improving performance in a number of sub-Saharan African countries“ during the period 1999-2005 and said this was “due in part to the advice and actions of the IMF, including on debt relief.“
Evaluators nevertheless found weaknesses and attributed these to “ambiguity and confusion about IMF policy and practice on aid and poverty reduction“ and to disunity among the governments that set the fund’s policies and oversee its operations.
“Differences of views among members of the Executive Board about the IMF’s role and policies in low-income countries“ led to a situation in which fund staff “focused on macroeconomic stability, in line with the institution’s core mandate and their deeply ingrained professional culture,“ the IEO said.
As a consequence, African governments took 74 percent of the increase in aid they received during the period and used it to service debt and build up currency reserves when they could have dedicated the extra money to health and education programs.
Critics contend that was a horrible diversion of charity but from a fund perspective, macroeconomic prudence would enable the poor countries to cope with future fluctuations in revenue--including aid, which even anti-poverty activists agree has had a fickle history.
Achieving unity and clarity among the fund’s disparate members will be Strauss-Kahn’s challenge.