Iran can't sustain gas subsidy

NY Times:

Western political and economic pressure on Iran over its nuclear program has chilled foreign investment to the extent that it is now squeezing the country’s long-fragile energy industry, adding strains to a government that is burdened by sanctions and wary of unrest at home.

The world’s fourth-largest oil exporter, Iran sits on the second-largest oil and gas reserves. But it has struggled in recent years to keep its oil production, currently running at about four million barrels a day, from falling.

Some analysts say that if this acute imbalance between stagnant production and rising demand at home continues unchecked, Iran will have no oil left over to export within a decade. Its oil exports, totaling $47 billion last year, account for half the government’s revenue.

“They have a perfect storm of problems feeding into each other,” said Robert Murphy, an analyst at PFC Energy, a consulting firm in Washington. He estimated that Iran might have no more oil to export by around 2015 if it did not rein in runaway consumption and reverse the long-term decline in its oil production.

“The domestic energy situation is as big as the international issue, and feeds into it in a very significant way,” he said.

To curb demand, which has been driven in part by subsidies that keep the domestic pump price at a mere 35 cents a gallon, the government plans to begin rationing gasoline in March, a measure so unpopular, and potentially explosive, that rationing plans have been put off several times in the past.

Iran’s energy problem is in many ways at the heart of the nuclear controversy as well. Iran’s leadership says it wants to develop nuclear power generation to free its petroleum resources for domestic use or for exports. The United States and other Western countries say Iran is using the program as a front for building weapons. At a time of relatively high prices, oil is clearly providing Iran’s government with enormous strength — but also with an Achilles’ heel.

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While Chavez has created scarcity by artificial holding down prices, Iran has created consumption by doing the same thing. Neither will work int he long term. The market is the best tool for controlling consumption and price. Attempts to artificially distort markets by controlling price are doomed to failure.