Iran - No oil EXPORT by 2015, Forbes and expert

Mullahs Gone Wild

John Mauldin, Millennium Wave Advisors 07.05.07, 12:44 PM ET

I want to briefly look at a development in the oil markets, which I find intriguing. Dr. Woody Brock, in a recent paper on oil prices, wrote a rather interesting sentence, to wit, that Iran would not have net oil to export in 2014.

I found that rather remarkable. Woody is very serious and sober-minded even for an economist, not given to rash analysis, but this was certainly a new idea to me. I knew they were importing most of their gasoline, as they do not have a great deal of refining capacity. As it turns out, there is much more to the story.

I have said for years that I expect Iran to be the new friend of the U.S. sometime next decade, as the regime is not popular and the country is growing younger. (Think China, once an implacable enemy.) I thought that the impetus would be the lack of freedom and knowledge of how the world is better off coming from the Internet, but it turns out that it may be a desire for more freedom combined with economic problems, which help bring about regime change, much as in Russia last century.

How could a country with the third (or second, depending on which source you quote) largest oil reserves in the world not be churning out ever more black gold? The answer, as it almost always is for such problems, turns out to be governmental and not economic in nature. Let's start out with a few facts.

Oil provides more than 70% of the revenues of the government of Iran. The rise in oil prices has been a bonanza for the regime, allowing them to subsidize all sorts of welfare programs at home and mischief abroad. And one of the chief subsidies is gasoline prices.

Gasoline costs about $.34 cents a gallon in Iran, or 9 cents a liter. You can fill up your Honda Civic for $4.49. In the U.S. it costs almost $40. In neighboring Turkey it costs almost $95. Iran is spending 38% of its national budget (almost 15% of gross domestic product) on gasoline subsidies!

And this situation is likely to get worse. Let's look at a rather remarkable peer-reviewed study done for the National Academy of Sciences by Roger Stern of Johns Hopkins University (original paper at link) late last year. Stern's analysis is somewhat political, in that he is critical of current U.S. Iranian policy, but this is just one of several studies that show the same thing:

"A more probable scenario is that, absent some change in Irani policy ... [we will see] exports declining to zero by 2014 to 2015. Energy subsidies, hostility to foreign investment and inefficiencies of its state-planned economy underlie Iran's problem, which has no relation to 'peak oil.' "

Iran earns about $50 billion a year in oil exports. The decline is estimated at 10% to 12% annually. In less than five years, exports could be halved and then disappear by 2015, predicted Stern.

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