Improving Iran's Domestic Energy Basket

Tilburg University

Improving Iran's Domestic Energy Basket

Moghaddam, M.R.

Publication date:

2003

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Citation for published version (APA):

Moghaddam, M. R. (2003). Improving Iran's Domestic Energy Basket. [n.n.].

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0 0 D e

..

Improving Iran's

Domestic

Energy

Basket

Proefschrift

Ter verkrijging vande_{graad van}doctor

aandeUniversiteitvan_Tilburg,

op gezag vanderector_{magnificus, prof dr. F.A. van der DuynSchouten,}

in_{het openbaar te verdedigen ten overstaan van}

een door het college van decanen aangewezencommissie

in de aula vandeUniversiteit

op vrijdag5 _{september 2003 te 10.15 uur}

door

MohammadReza_Moghaddam

Promotor: prof dr. ir.J._Ashayeri

Copromotor: dr. ing. W.J.H.van Groenendaal

©2003_{Mohammad Reza Moghaddam}

All

_{rightsreserved. No partofthispublication maybe}

reproduced, stored in a

retrieval_{system,or transmitted, in any form or byanymeans,electronic,mechanical,}

photocopying, recording,orotherwise,withoutthe_{priorpermission from the}

To My Family

ACKNOWLEDGEMENTS

This PHD _{thesis has been presented}at

_{Tilburg University,}

Department for

Economics and BusinessAdministration.

I am _{extremely grateful to Dr.}Jalal

_Ashayeri,

who

_initially

_{provided me with}

the idea to

write

a thesis on thisverysubject and for readingthetypescript.

His valuablecomments saved mea_greatdeal

oftime.

My

Sincere thanks goes to Dr.

Wilhelm

VanGreoendal, whomade valuable

critical comments on its arrangement anddidoversee theproject during many meetings withtheauthor.

I owe a great debt

of

gratitude to my supervisor in Iran, Dr.

Majid

Ahmadian

for his _{professional support and} to Dr.Mohammad Mazraati forhis creative support.

And last but not

least, I would like

tothank_my

_family,

_{particularly my wife}

Vajihe

Maleky for

her unfailing encouragementandsupport during allthese

years.

Improving Iran's

Domestic

Energy

Basket

Chapter 1 Introduction to

the

Problem

1.1 Introduction 1

1.2 ResearchObjectives 1

1.3 Research

_{Methodology 4}

1.4 Researchstructure 7

References 9

Chapter

2

Iran's

_Economy

and

Domestic

_Energy

Markets

2.1 Introduction 11

2.2 Iran'sMainDevelopmentIndicators 13

2.2.1 PopulationandEmployment 13

2.2.2 OilRevenuesinIran'sEconomy 15

2.2.3 EconomicTrends 17

2.3 TheroleofenergyinIran's economy 22

2.4 _EnergyPricesand_{ImplicitEnergy}Subsidies 33

2.4.1 Petroleum ProductProduction Cost 34

2.4.2 Energy

Prices 36

2.4.3 _ImplicitEnergySubsidies in Iran 40

2.5 EnergyPolicyFormulation 43

2.5.1 _{Decision Taking}andDecision Making 44

2.5.2 Policy ImprovementPlans 47

2.5.3 RegionalOpportunities 49

2.6 Conclusions 50

References 53

Chapter

3

World

_Energy

Outlook

3.1 Introduction 57

3.2 _Long-termEconomicGrowth 58

3.3 WorldEnergyDemandandSupply 60

3.4 _EnergyIntensity 70

3.5 The Price of Oil 72

2 3.6 Conclusions 75

References 76

Chapter

4

Determination

of

Strategic

issues 4.1 Introduction 79

4.2 _StrategicPlanning and

SWOT

Technique 80

4.3 The MissionofIran's_{Domestic Energy}Sector 84

4.5 Domestic EnergyMarket: Strengths andweaknesses 88

4.6 Strategic issues 94

4.7 Conclusions 97

References 98

Chapter

5

_Energy

Demand

_Modeling

5.1 Introduction 101

5.2 Criteriaformodelselection ₁₀₂

5.3 _{Types o}fModels andTheirUse 105

5.3.1 TraditionalEconometricModels 106

5.3.2 General_{Equilibrium Models} 108

5.3.3 VectorAutoregressiveModels 109

5.3.4 Pros andCons 111

5.4 Available data 113

5.4.1 Macroeconomicdata 113

5.4.2 AvailabilityofEnergy data 114

5.5 GeneralOutlineoftheEnergyModel 119

5.5.1 Reviewof_EnergyModels 119

5.5.2 ASimultaneous_{Equation Model for Iran's} 123

Domestic_{Energy Sector}

5.6 Conclusions 127

References 129

Chapter

6

_{Estimation, Simulation,}

and

Forecast of

Iran's Final

and

_{Primary Energy Demand}

6.1 Introduction 133

6.2 _{Methodology Applied} 134

6.3 Estimation Results 136

6.3.1 _{The Keynesian model} 137

6.3.2 Final_{Energy Demand}Model 147

6.3.3 _{PrimaryEnergy Demand}Model 158

6.3.4 _{Energy Subsidies on}Final_{Energy Demand} 165

6.3.5 AdditionalPerformance Measures 167

6.4 TheReference Scenario 168

6.4.1 Values fortheExogenousVariables 168

6.4.2 _Forecasting 174

6.5 Conclusions 180

References 182

Chapter

7

_Optimizing

Domestic

_Energy

Demand

7.1 Introduction 183

7.2 _{RemovingEnergy}Subsidies 185

7.2.1 RemovingtheImplicitSubsidies_(2001-2007) 186

7.2.2 _{Energy Demand Under}BorderPrices(2007-2020) 195

7.2.3 OverallResults Under theRSscenario 201

7.4 _EnergyConservationPolicies inVarious Countries 206

7.4.1 Establishingthe Energy Savings Potential 207

7.4.2 EnergySavingProspects in theUK 208

7.4.3 _EnergySavingPolicies in theUK 211

7.4.4 EnergySaving Prospects intheNetherlands 214

7.4.5 _EnergySaving Policies intheNetherlands 217

7.4.6 EnergySaving Prospectsin Thailand 220

7.4.7 _{Energy Saving}Policiesin Thailand 222

7.4.8 ComparingtheThree Countries 223

7.5 _EnergyConservationPotential of Iran 226

7.6 Further_ImprovingIran's_EnergyBasket 232

7.6.1 Impact

of

ExtraEnergyConservation 235

7.6.2 ImpactofExtra Conservation onGDP 237

7.7 Conclusions 238 References 241

Chapter

8

_Epilogue

8.1 Introduction 243 8.2 _SummaryofResults 244 8.3 FutureResearch 248

Appendix A: Overview oftheModel 251

Appendix B: List of Variables 255

Chapter 1

Introduction to

the

Problem

1.1 Introduction

The Islamic _{Republic of Iran is} a _{country with many problems, especially with its}

economy. However, for many people _{outside Iran, its name} is associated with three products: pistachio nuts, carpets, and oil. Although the first _{two products are well}

known, theycontribute only asmall fraction to the Iranianeconomy. Oil comprises

the vast bulk oftheIranianeconomy.Therefore, itisimportant that Iran usesthelatter

to thebenefit ofthe economy. On this principle all Iranians agree, but the question is

how it can be achieved. Most people in Iran believe that the current policy; that is,

makingenergyavailableatextremelylowprices, is the best way fortheIranianpeople

to benefit from its energy resources. In thisstudy we analyzethis popular belief and

will

reveal _{alternative policies.} Furthermore,since oil is anexhaustibleresource, we

will showthatIran's currentdomestic energypolicy

willlead to

aneconomicdisaster

in the notsodistant future, andthat drastic changein Iran's domesticenergypolicy is

required.

This chapter contains a brief introduction to the problem analyzed in this

research. Section 1.2discussesthe subject andobjective ofthisresearch. Section 1.3

discusses the research methods used, and Section 1.4 contains an outline of the contents.

1.2 _{Research Objectives}

The subject of this research istooptimize, orbetter improve, the longer-term -up to

2020- use

of

different energy carriers in the Islamic Republic ofIran. Generally

international and domestic energy markets, and avoids and/oreliminatesthreats and constraintsfaced bythe domestic energy sector. Atpresent thelevel

of

consumption

of

differentenergy carriers as well as thedivision

of

consumption overenergy carriers

in Iran is far from optimal. Due to _{Iran's extremely low prices} ofenergy carriers, energy is not allocatedefficiently.

TheIranian_{economy dependsheavily}on crudeoilexport, which is some 80%

oftotal_exports.However,the market share allocated by OPEClimitsIran's

oil

_export.

Improving Iran's production capacity could result in a _larger market share when

renegotiating the shares, but with many

of

Iran's reserves beyond their production

peak a _significant increase _{in production} is

difficult if

not _{impossible to realize.}

Therefore, the domestic growth

of

consumption of all types

of

energies strongly

affects theIranianeconomy.

During the years 1988 to 19981, Iran's average annual growth rate

of

final

energyconsumption has been 6.7%, and at the same timethe averageannualgrowth

rate ofthe consumption

of

refined petroleum products has been 4.2%. If this trend continues, the domestic demand

of

crude oil willbeaboutthree millions barrels per

day by the year 2010 (IIES, 1994). On the _{other hand, crude}

oil

production will, by

2010, be less than 4 million barrels perday. Iran's main reserves havepassedtheir

peak production, andreservoirpressuresaredropping. Even iftheNational Iranian Oil

Company_(NIOC)managestodevelop allnewfields currently known, production will onlybeabout3.5-3.8million barrels per day by 2010 (IIES, 1994).

Figure 1-1 illustratesthevarioustrends.

If

Iran's domesticenergy policy is not changed, there is a fair chance that Iran's domestic consumption requirements will

change it from an oil exporting country to an oil importing country somewhere

between 2010 and 2020. Asa _{result, the}income from oil will be reduced_drastically.

Even policies to reduce domestic

oil

consumption, such as the investment in gas

production facilities for domestic gas use and for the use of gas in oil and _power

production will no longer be possible. This

will

hamper the improvement of oil

production_{in existing fields, as well as}thedevelopment of new

oil

fields.Needless to

say,that beforethis happens Iran willfacesevereeconomic andsocialproblems.

'

5000 -4500 4 4000 2 ₃₅₀₀

.- -er.- 0-4-.--:Z»•--.- 6

-& 3000

A-0

2500

-'+-'

-*-*.-r*e-0 2-*-*.-r*e-0-*-*.-r*e-0-*-*.-r*e-0

8

1500

*-,"e-'e-'+

1 S 1000 500 H w u --I U U LI W D Q W :1 U I U m A 0 •I i• • ,I l l• . , • , . . . ,I:I.

/4 d . 49 Ji,t3 42 tall *di. 402 802 40, A

Source: IES, 1994

-+-Total -0--Plimary -Oildemand -*-Secondary

Figure 1-1. PossibletrendsofIranian domesticoil_productionand_consumption

Apart from oil Iran has large associated and non-associated natural gas

reserves. These gas reserves are difficult to export. However, gas is produced for

usage in oil production. With good domestic energy policy it is possible to _(partly)

replace thedomestic use ofoilproductsbynatural gas; this canbeachieved in several

direct and indirect ways. This policy would postpone the switching point from oil

export to oil import, and oil export ispossible for a longer period oftime, earning money that can be usedtoimprove thenon-oileconomy(MinistryofEnergy, 1999).

In the

past, three main factors have contributed to the inefficient and

uneconomical energy consumption in Iran. These factors are:

- The

energy sector is under the complete

control of

the government and is

managedinefficientlyand_{ineffectively.}

- _{Iran'sdomestic energy pricesare}

among thelowest intheworldandoften even

below productioncosts._{Domestic energy use}is_{implicitlyheavily subsidized.}

- The absence

of

effective non-price energy policies that would mitigate the

effectof thelow_energyprices.

Allthreefactorsareimportant, buttheextremelylow(subsidized) prices

ofthe

energy

carriers have caused the high rates

of

energy growth in households as well as

industries. Furthermore, the lack

of

energyconservation regulations, suchasbuilding

Also intheprimaryenergy sector(powerandrefinery)thecurrentorganization

of

the domestic energy sectorleads_{to severe problems. Because energyprices are low,}

the sector cannot invest from its own financial resources, but requires government

funding and _{is subject to constantministerial control. This results in slowand often}

ineffective decision-making, which culminates intolargeinefficiencies inthe_primary

energysector.

Thus, Iran's _{present energy} basket is not _{optimal, neither from} an available

energyresource, nor fromaneffectiveandefficientusepoint of_{view. Therefore, this}

research aims at

"identifying the strengths and weaknesses of Iran's domestic energy sector, as

well as its opportunities and threats, in order to formulate a domestic energy policy that, better than the current policy (or better the lack thereoD, benefits the Iranian

economy in the long-term..

The research will in particular answer the question of how Iran's energy

pricing policy should be adjusted, possibly in combinationwithenergyconservation

policies, to _{improvedomestic energy use and} Iran'seconomic _{performance. It is our}

intention to base_{our policyproposals}onsound_{empiricalanalysis. The readershould,} however,be aware of the_{many political} and_{economic problems Iran faces (and has}

faced in the past),which complicate suchan_{empiricalanalysis.}

Apart from the _{complex problem}

of

Iran's _{domestic energy prices, Iran has}

two other main policy issues. First, Iran has large quantities

of

associated and

non-associatednatural gas that canbeproduced cheaply, and is easier tousedomestically

than to export. This policy is alreadyin _{place and progress has been made. Second,}

Iran's _{government sector is large and operates slow.} The _government exerts _tight

control over all energy related activities. First steps have been taken towards

liberalization and privatization, but these steps are far from adequate to having an

1.3 Research_Methodology

To _{improve Iran'sdomestic energy}policywe apply acombination

of

methods. First

we apply strategic planningto identify Iran's threatsandopportunities as well as its

strengths and weaknesses. These are then used toidentify the mainstrategic issues and

to formulate the main policies. _Second, an econometric model

of

Iran's domestic energy sector isformulated. This model is then usedto analyze the formulated policy

scenarios.

Foran_{organization or firm,}theformulation ofa_strategyisbased_{on surveying}

the external environment for threats and opportunities, and an internal survey of

strengths and weaknesses,taking intoaccount the expectations

of

stakeholders and the

institutional culture of the organization (Hill, 2001). As is shown in _{Figure 1 -2,}

strategy is created at the intersection of an external appraisal of the threats and

opportunities an organization faces in its environment, expressed in terms of key

factors for success, and an _{internal appraisal of}the strengths and weaknesses of the

organization itself,

distilled into a set of

distinctive competences. Outside

opportunities are to be exploited byinside strengths, while threats are to beavoided

and weaknessescircumvented._{The values of the leadership as well as the ethics of the}

society and other aspects

of

so-called social responsibility are to be taken into

consideration, both inthecreation ofthe strategies andin theirsubsequentevaluation

when choosing the"best" strategies. Oncea strategy hasbeenchosen, itistranslated

into policies that canbe implemented. Intheliterature this is knowasStrengths and

Weaknesses, andOpportunitiesandThreats or_{SWOT analysis (Koch, 2000 and 2001;}

and MindToots, 2003).

According to the above, the strengths and weaknesses, and the opportunities

and threats the_organizationfaces mustbe_specified.Astrategy willbechosen in such

a way that

it

captures theopportunities andstrengths, and reducesthe weaknesses as

well asthe possible effects

of

threats. The strong and weak points are theresult of an

internal analysis. These are within the authority ofthe policy makers and they can

influence them. The opportunities and threats are part ofthe problems environment

This methodology willbe appliedto Iran's domesticenergy sector. Although

SWOT analysis has _originally been _developed for corporations and their strategic

planning, the methodology can also be applied for a region or a country. In each

situation, one can identify the internal and external factors needed for a SWOT

analysis. This can then be used to complete the analysisasoutlinedin_{Figure 1 -2.}

External _Internal

appraisal _appraisal

1 1

Threats and _{Strengths and}

opportunities weaknesses inthe ofthe environment _organization Result:Key

_{/ R=ux.}

successfactors

\

Distinctive

Formulation

competencies of strategies Social _Managerial responsibility values

=04 Evaluation

.of 1

T strategies

1

Formulation of policies

Figure 1-2. Selectinga_strategybased_{on strategic analysis}

Once the policies to implement the strategy have been _{formulated, their}

viability needs to be tested. For this a quantitative _{instrument in the form of an}

econometric model

of

Iran's s domestic _{energy market shall} be formulated. This

instrument shouldallow ustoquantifytheeffects ofthe policyandcheckwhether the proposedpoliciesarebeneficial totheIranian economy and theIranianpeople.

There are afew restrictions forthis research. _{First, Iran is}amember of OPEC

and intends to stay within OPEC. We will not analyze what could happen if Iran

domestic energy market. Furthermore, Iran has many political problems, both

domestically and internationally. On top of that Iran is located in a part ofthe world

that isknown for its manypolitical problems that cannot be resolvedeasily. When

finalizing this study the United States invaded Iraq, and it is unclear what the near

future

will

bring to the Persian Gulf region. We are aware of the many political

problems andundoubtedly a war in Iraq will haveaneffect on Iran -whichwaslinked

to Iraq_{in president's Bush's axis of evil-, but it}isbeyondourresearchcapabilities to

analyze thepossible effects of the war.

1.4 ResearchStructure

The startingpoint forthisresearch isa_description

of

Iran's current economic situation

as well as a brief review of its past since the 1979 Islamic Revolution. This is the

subject

of

Chapter 2. We will show thatthecurrent domesticenergypolicyharms the

economy and ifthe current trends in domestic energy consumption andproduction

continue, Iran will face farmore serious economicproblems than

it

already does. This

domestic_{analysis ofthe strengths and weaknesses}ofIran's domestic_{energy sector, as}

well as its opportunities and threats, is essential for the formulation of a better domestic energypolicy.

Moreover, the Iranian _economy is _{affected by several} international factors,

such as the

policies of oil

_{producing countries, and more in particular OPEC,}

international oil markets and more general international energy markets, trends in

future consumption

of

energies in the world, energy intensity in developed and

developing countries, environmental _{policies, etc. In} the _{strategic planning}

methodology,thesearecalled environmentalfactors that arenotunder theauthority of

domesticdecision-makers. They may holdthreats oropportunitiesforIran'sdomestic energy sector and it is necessary to analyze these threats and opportunities. This is

discussedin_{Chapter 3.}

The analyses

of

Chapter 2 and Chapter 3 are used in Chapter 4 to conduct a

complete SWOT analysis and formulate strategies as outlined in Figure 1-2. It

explains how the SWOT analysis can be used to analyze Iran's domestic energy

To analyze the potential policies that result from the new domestic energy

strategyasuitable model _{is required. Chapter} 5 _{reviews energy demand models and}

theirusefulness forourresearch goal. Itdiscussesthreemaintypes

of

models General

Equilibrium, Variance Autoregressive _models, and traditional Structural or

Simultaneous Equation models. We

will

argue which type is most suitable for our

analysis.

In Chapter 6 the actual model is built and _{tested, and used} to simulate a

reference scenario up to the year 2020. This reference scenario indicates how the

domestic_energysector will_developwithouta_{changein policy.}

Chapter 7 evaluates the

effects of the

new domestic energy policies as

formulated in Chapter 4 and analysis how these affect economic growth. It will be

shown that,contrarytopopularbelief in_{Iran, domestic energy}price_{increases have a}

positive effect on the domestic economy. The effect

of

_{increased energy prices is}

domestic energy conservation, which increases theoil export potential. As we shall

show, the income from extraoil exports in combination withthe domestic revenues

from increased energy prices, allows the Iranian economyto lower inflation and to

invest morein economic_development.

References

Hill, C.W.L., and G.R. Jones, 2001, Strategic Management Theory - An Integrated

Approach,

e

_{ed.), Houghton Mifflin, Boston.}

IIES, 1994, First Phase

of

_{optimising consumption} and _production

of

_{energy in}

Iran, Institute forInternational Energy Studies,[inFarsi],Tehran.

IIES, 1994, Supply and demand

of

energy in Iran- the share of oil up to 2010,

Unpublished Manuscript, Institute for International Energy Studies, [in Farsi],

Tehran.

Koch, A.J., 2000, SWOT does not need to be recalled: it needs to be_enhanced,

Part 1 BQuest, 20.

Koch, A.J., 2001, SWOT does not need to be recalled:

it

needs to be_enhanced,

Part 1 BQuest, 3.

MindTools,2003,www. mindtools.com/swot.html,on 15/01/2003.

Ministry

of

Energy, 1999, Energy Balance Yearbook, Deputy

of

EnergyAffairs,

Ministry ofEnergy,[inFarsi], Tehran.

NIOC Exploration Management, 1998, Five-Years_{planreport, (in Farsi), NIOC}

Chapter 2

Iran's

_{Economy and Domestic}

_Energy

_Markets

2.1 Introduction

Inthis chapter themain_{strengths and weaknesses, as well}asopportunitiesand threats

governing Iran's economy are reviewed. Given the subject of _{this research, in}

particular the role oil and gas play in Iran's economy will be discussed. Iran's main

export commodity iscrude oil and Iran is a_{prominent member of}OPEC. _Although

the OPEC member countries reviewtheproductionquota at least every_{six months, a} country's production quota does not fluctuate that much. As a _{member of OPEC,}

Iran's totalcrudeoil productionquota is, for thetimebeing, set at3.84millionbarrel

per day_{(bbl/d),which is, as we will show, close to itsproductioncapacity. Changes} in quota are usedin efforts to stabilizetheprice

_of

_{crude oil; OPECcurrently aims at}

a price of oil _{between 22 and 28 US$} per barrel. Despite these _efforts, theprice of

crudeoilshows largefluctuations. InJanuary 1999 the price was less than 10 USS per barrel, whichpassed insilence, whereas it was more than 32 US$ in February 2001,

leading to strong pleas fromthe industrializedworldto increaseproduction. Because

of

these swings in international

oil

prices, Iran's income from oil export is very

volatile, and this

of

coursehas strong implications foritseconomy and theplanning

thereof.

There is one extra complication. The production quota set by OPEC cover

domestic demand and_{export. So}a_growingdomesticdemand foroilproductsreduces

the amount of oil availableforexport. As_{we shall show,}thiscauses majorchallenges

for Iran's domestic energy policy,sincethisproblem was -and toa large extend still

unsustainable domestic energy

policy that can, as we will show, only

be solved

throughtoughpolicy _{measures, such as}adrasticdomesticenergypriceincrease. The

question is how to formulate these measures in such a way that the short-lerm

negative economic and social consequences for theIranian_peopleareminimal.

Already formany years Iran hasimplicitlysubsidizeddomestic_{energy use (as}

it does withmany othercommodities) through extremelylowprices,whichareamong

the lowest in theworld. For example, the price ofoneliterregularunleaded gasoline

in Iran in the year 2000 was4.7 US$-cents, based on the freemarket exchange rate.

This priceisextremely low compared to32.8US$-cents in the USA,94.4 US$-cents

in Germany, 108 _{US$-cents in the Netherlands, and 136 US$-cents} inNorway in the

first quarter of 2000 (IEA, 2000). The _prices

of

other oil _{products reflect similar}

differences, as do natural gas and to a lesser extent electricity. The current pricing

policy is suchthatenergy use in Iran is_{implicitlyheavilysubsidized, since energy is}

sold below its opportunity value (and on several occasions evenbelow its production

Cost).

The energy intensities

of

Iran's economic sub-sectors that resulted from this

domestic energy policy are much higher than those _{in other countries, and have} increasedrapidly for a long time. Domestic primaryenergy consumption has grown

by a factor 5.6, from 142.4 million barrel of oil equivalent (BOE) in 1974 to 795.1

million BOE in 1998, most

of

which is met by

oil

products, whereas the real GDP

grew by a factor of 1.6 only, from 10,869 billion Rial to 17,051 billion Rial

respectively. This large difference in growth factors, which was not the result of a

drastic change in thestructure ofthe economy,illustratestheseverity ofthe domestic energy problem.

Remark: For this research a _databank, containingenergy and economic data

was established in cooperation with the Institute for International Energy Studies

(IIES) in Tehran. All data were made consistent and therefore can differfrom those

published by, for example, the Ministry

of

Energy in the Energy Balance and the

StatisticalYearbook.

A

brief_{description of the}dataavailable willbe_{given in}Section

5.4.

Thishasresulted inadomestic demand for oil of1.21million_{barrels per day,}

limiting the

oil

exportpotential to 2.51 million barrels per day in 1998. So, implicit

energy subsidies are increasing rapidly and at the same time exports earnings are

amounted to more than US$ 14.3 billion in 1997 _(whichis about 95 percent of the

dollarvalue of

oil

revenue).This mechanism puts a lot

of

pressure onIran'seconomy

and_seriouslylimitsits_{potential for growth.}

In thischapterIran'seconomic developmentisreviewedand special attention

will be paid to the role

of

energy inthegrowth ofthe economy. Section 2.2 reviews

Iran'smain economic variables, its economicgrowth rate, employment,productivity,

and _{population growth, as well as} some _{relevant past policies.} Section 2.3 _briefly

reviews _{Iran's primary energy reserves, and discusses} domestic _{energy production}

and consumption. The energyintensities

of

variouseconomicsectorsarediscussed in this section also. Section2.4 discusses thenominal andrealdomesticpricesofenergy,

borderprices, and what this meansinterms

of

implicitenergy subsidies. Section 2.5 reviewsIran'sdomesticenergypolicy intentions forthefutureasagreed upon by the Iranianparliament,theMajlis.Since Iran isa_{member of OPEC, the role of OPEC and}

its impactson Iran's economy as well as the quotarestrictions are discussed in this

section also. Section 2.6 contains conclusions.

2.2 Iran'sMainDevelopmentIndicators

This section discusses the main indicators that are

of

importance when describing a

country's economy. These comprise demographic _indicators, macroeconomic

indicators, and for Iran the role of oil andoilincome.To understandIran'sstrengths

and weaknesses, as wellasopportunitiesand _{threats, it}is necessary todiscuss all of

these issues. In Subsection 2.2.1 population and employment are discussed. Subsection 2.2.2 reviews the role of oil revenue as a share ofthe total economy government expenditure. Subsection 2.2.3 is concerned with macroeconomic

indicators as _{real gross domestic product, labor productivity,} and investment and

consumption.

2.2.1 Population andEmployment

According tothe international population classification, Iranisamong the top fifteen

of countries interms

of

population growth (IMF, 2000). In 2000,the population was

63.9 million people (CBI,2001), compared to 31.95 millionpeople in 1974. A high

Iranian population. Table 2-1 shows the share

of

young people in Iran's total

populationbetween 1974 and 2000.

Between 1974 and 2000 major changes occurred in terms

of

rural andurban

population also. The share oftheurban population grew from 45.1% in 1974 (14.4

million) to 64.7% in 2000(41.4million).Thetotalannual_{population growth rate over}

theperiod1974-2000 was 2.7%, but thepopulation growth rate

of

cities over the same

period has been4.1%annually, whereasinrural_{areas it was only 1%. This}shows that

the Iranian economy is changing from a rural economy, based on agricultural

products, to an urban economyrequiringa_{largermanufacturing}andservices sector.

Table2-1._{Iran's population}structure

Year Total population Annualgrowth Age group 0-19 Population 15-65

(Million) rate_{(Percentage) (Percentage) (Percentage)}

1974 31.9 2.7 54.7 51.4 1980 39.3 3.9 55.3 51.6 1985 47.6 3.9 55.8 51.3 1990 54.5 2.5 54.9 51.9 1995 59.2 1.5 51.9 55.0 2000 63.9 1.6 49.4 57.7

Source:IranStatistical_{yearbook,Statistical Center of Iran, 1998; and CBI, 2001.}

The share ofthe_populationat_{working age(15-65 years)}has_{grown also, from}

16.4 million in 1974 to 36.9 _{million in 2000,} an annual growth rate of 3.1%. To provide work forthe young urban population, strong economic growth is required.

However, as we will show next, the growth

of

employment opportunities has been

much lower,leading to much (hidden)unemployment.

Employment

In 1974, about 8.43 million people were employed, whereas in 2000 this number

almost doubled to 15.87 million,an averagegrowth of only2.40%_annually.The_major

part ofemployment in the _{private sector is in} small commercial _enterprises. Total

private sector employment in 2000 was about 68.8% The government sector, with

31.2% in 2000, was by far the largest employer. This indicates a seriously inflated

government. The ratio

of

people employed over economically active people' was

1 Economically activepeople are the peoplebetween the ages of 10 to_65,excluding

83.7% in2000,which inturnresults in an unemployment rate of16.3%(Central Bank

of Iran,2001).Especiallyinrecent years Iranhasexperiencedastrong increase in the

rate

of

_{unemployment, in 1996 it was much less 9.1% (CBI, 1997).}

Every person with work, on average, has to earn enough to support 4.2

persons. This situation is worse when the hidden unemployment in the inflated

governmental sectoristakeninto account. For an extended discussion of these

populationissues,see_{Salehi-Isfahani (2000).}

2.2.2 OilRevenuesinIran'sEconomy

Iran, as an oil exporting country, is in the group

of

basic commodity supplying

countries. Its national economy strongly depends on the export

of

crude oil.

Therefore, the performance

of

Iran's total economy is strongly affected by

fluctuations in oil income, and given OPEC's quota system these fluctuations are

mainlycausedby fluctuations in international

oil

prices. This dependency of oil can

befurthercharacterizedasfollows; alsoseeTable 2-2.

Table2-2. Importance

ofoil

incomeinIran'seconomy(inpercent)

Year Share of oil in export Share of oil income in GVAo,isec,04 GDP

income governmentbudget

1974 89.0 86.4 44.4 1980 94.8 61.1 9.4 1985 96.8 39.7 14.1 1990 93.2 53.9 21.2 1995 82.4 64.2 18.1 1996 86.1 57.2 17.5 1998 75.7 30.8 15.6 2000 85.5 59,0') 13.6

Sources: National Account o fIran,Central_{Bank Yearly}Balance, andEconomic Trends, all published bythe Central Bank of Iran.

Note:Gross valueadded (GVA) and GDPin constant1982_{market prices.}

Thisincludesoilrevenue andincome formfreemarketoildollarsales.

The ownership

of

Iran's oil andgasreserves as well as all relatedindustries is

with _{the government.} Since oil is Iran's main export commodity, a _{large part of the}

publicbudget stemsdirectly from

oil

export. Anyunexpected decrease inoil income

Table 2-2 shows that theshare

of

crudeoil export intotal export income has

always been more than 75%, even when oil prices were low, and normally is over

80%. During theperiod

of

1974-2000dollaroil _{revenues were on average responsible}

for more than 86%

of

Iran'sdollarrevenues

In addition, the share ofoil income in the government budget is high too.

Table 2-2 shows this share _{strongly fluctuates,} which is due to fluctuations in

internationaloil prices. Figure2-1 showsthe trend

ofthe

OPEC basketoil price and

Iran's revenue fromoil export. The_{figure shows that, with}theexception ofthe years

1980-1982 whenIranfacedalower level of oil production, and as a resultoil export,

due to theIraq-Iran_war,Iran'soil revenuesclosely follow theoilprices. Theshare of

oil revenue inthe basket_{ofgovernment revenues was 86% in 1974 and}morerecently

about 60% 40 35 -4 -& in billion U$ 30 \ 25 -20 10 \ A M

J.-5 0

*P*&44494/44#P#* d/*P#P#t#Bdp#'*Pe" 40

Soune ASB.1999 _-I-OPECBasketPnce-tran'soil revevue I

Figure2-1 OPEC'soil_priceandIran'soilrevenue

The importance of oil is also reflected bythe share of the real gross value

added of theoilsector in Iran'stotalreal gross_{domestic product (GDP),}which is on averageabout 19%;seeTable 2-2.

Over 95% ofthe domestic energy demand is met by thefossil fuels oil and

gas, whicharetransformed_{byIran's energy sector intothe energy}carriersdemanded.

Iran's government sector has grown rapidly in the past and allmajorenergy industriesareeither owned bythestateor completely depend on thestate. Examples

are the National Iranian Oil Company (NIOC), the National IranianGas Company

(NIGC), the National Iranian

Oil

Refining, Distributing _{Company (NIORDC), and}

NationalPetrochemical_{Company(NPC), which are}allsubsidiaries ofthe_{Ministry of}

Petroleum; alsoseeSection 2.5.

Note thattheenergysector is not the onlysectordominated bythegovernment;

also the insuranceindustry, iron_{and steel, and the}bankingsectorsareeitherowned or

completely controlled bythe government.

2.2.3 EconomicTrends

When discussing the changesin Iran's GDP since 1974, threemain_{periods have to be}

distinguished. Thefirstperiod istheperiodbefore theIslamic_{revolution (1974-1979),}

whichwas politically unstable time due to social unrest. The secondperiod,

1979-1988, was a very chaoticperiod, which started withtheIslamic revolution in_February

1979 andshortly_thereafter, in September 1980, Iraq invaded Iran,starting a war that

lasted

till

August 1988 whenaceasefire was agreed upon. Thethird period started in

1989, when rebuilding Iran was high on the political agenda. _{To achieve this the} Iranian _government introduced social-economic _{five-year plans,}

which were

introduced forthefirst time in 1989.

The first

two periods, for obvious reasons, show large fluctuations in

production. The real grossdomestic productatconstant 1982market_{prices (denoted}

by_GDP) firstincreased from 10,869 billion Rial in 1974 to 13,255 billion in 1977,

but then camedown_{sharply to 9,177billion in 1981;}see_{Figure 2-2.}

During the war period Iran's export capacity decreased, whereas its requirements increased. This isillustrated in Figure 2-2 by the fact that GDPisbelow

or only slightly above the sum

of

consumption, _{investment, and government}

expenditure.

However, as a _{result of the war effort,} the reduction in GDP was partly

compensated bya_{considerable growth in 1982 and 1983, and in 1985 it was 11,607}

billion Rial again. _{Thereafter, the real} GDP decreased again for two years and was

rather constantuntil 1989. Iran's efforts to increase its GDP during this period were

counterbalanced by the destruction of many ofitsvital industries and the resulting

continued reduction inoil incomes.

18000 16000

/-,-3-i

14000 -17SA 1

ri

t

/

.-I

'7= 1-14« r-»» f<x-

_l

_f

_--.

-r--Wic

= 1 r-'----. /

FS 1 2000 -0 1974 19751976 19771978 197919801981 1982 1983 1984 19851986 1987 1988 19891990 1991 1992 19931994 1995 199619971998

I-'-Cortsumpton -'.-Investment-_{Government expendihre -Trade balance I}

Figure 2-2. GDP and itsmain components in 1982_{market prices}

In 1989, one yearafter the 1988 cease-fire andthestart ofthereconstruction,

real GDP was 11,067 billion Rial Since then, real GDP has showna moderate but

continued growth; alsoseeFigure 2-2. To coordinatereconstruction, thefirstfive-year

plan wasdeveloped fortheperiod 1989-1994.

Table 2-3. _{Labor productivity, and} GDP, consumption, and _{investment per capita in}

103 Rial

Year _Productivity

GDP

Consumption Investment

1974 1288.9 340.2 118.7 51.1 1980 983.3 240.8 136.4 47.0 1985 1132.9 256.1 153.2 45.3 1990 973.3 225.9 138.8 25.3 1995 1073.7 258.8 158.1 38.5 2000 1189.9 290.5 171.3 37.9 Growth:1988-2000 2.3% 2.9%

10%

4.5% Growth: 1974-2000 -0.3% -0.6% 1.4% -1.2%

Source: NationalAccount ofIran,CentralBank YearlyBalance,andEconomic

Thewar period also (partly)explains thegrowth ofthegovernment _{sector, but}

the main cause

of

Iran's inflated government is the _revolution, in which the "great requisition"and"nationalization" occurred. This was_partlybecause oftheeconomic

view

of

politicians who thought (andmany_{still do) that}the government can run the

economy,and_partlybecause thewarneeded_{extraordinary coordination of all efforts}

Due to thefastpopulationgrowthandchaoticeconomic development, the per

capita GDP decreased by 0.6% per year, and came down from 340 thousands Rial

(5,196 US$) in 1974 to 295 _{thousands Rial (168 US$) in 2000;} see Table 2-3. A

reduction

of

almost 24% in _{per capita income,} based on real Rial values, which is

even worse inUS$terms. In thesameperiod, the number

of

employed people went up

from 8.4 million to 15.6 million. Asa_result, laborproductivity fell from 1.29 million

Rial_{peremployee(17,488 US$) in 1974 to} 1.19_{million Rial (680 US$) in 2000; see}

Table 2-3.

100%-T -- fr T T 7, 7 T T T T T T WI T F T T T T T T F T

1

:6&900#fill'*94014"Jal,!11

80%- --# ffit- ..6112. #ffiffil

iat .

60% - . - -2

_i---

_---- 40% 20% -0% . , . . . ..L, 1. . , - . . . . . . . . . . . . , . . . , '974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 20%

-0 consumption 0Investment 0 governmental expenditure Elnet export

Figure2-3. Shares of GDP componentsinconstant 1982_{market prices}

Although labor productivitydecreasedduringtheperiod_{before 1989, and as a}

resultduringthetotal period 1974-2000, thecountrysucceededin improving its labor

productivity during the third period, witha_{growth rate of 2.3% per year;} seeTable

2-3. The annual growth rates for the whole period and the period afterthe ceasefire show that some_{improvement has}beenachieved forthelatter_period.

Bottom line is that the average growth rate

of

population in 1974-2000 was

growth has been 2.1% per annum onthe average in thesame period, resulting in an

annualdecrease_ofpercapita GDP by 0.6%.

Consumption andcapital formation

As shown in figure 2-3, theshare

of

private expenditure in real GDPhasgrown from

34% in 1974 to more than 67% in 1990 andthen decreased againslightly to 57% in

2000. _{Adding government expenditure}

of

about 11%, the national expenditure is 69% of GDP.

Theshareofcapitalformation in 1974 was 14.9%, increased to 24.8%ofGDP

in 1977, the highest value in the whole period, and showing, with some swings, a

downward trend. The share was 12.6% in 2000. Compared to other developing

countries theshare

of

capitalformation in Iran isrelatively low. 100% 90% 80% 70% -60% - 4096

%

:€«*86*. , 4= 30% -

»

»1*

_1=S

-:.' R: ·>..>·.. 2,#P# B. 20% 10% -0% 1994 1995 1996 1997 1998

OAgriculture 00il aIndustry&Miningo Senices

Figure2-4. Contributionofeconomicsectors ingenerating GDP

Compared to more successfuldeveloping economies, an investment share of

14.1% is a low. Forexample, the shares

of

capital formation in real GDP

of

China,

Malaysia, South Korea, and Indonesia are 43%, 39%, 38%, and 29%, respectively

(IMF, 2000). The share

of

capital

formation in GDP of

OECD countries is also

considerably larger,denotingabottleneck inIran'sGDP growth. Capital formation in

some selected OECD countries is, United Kingdom (19.6%), USA (16.7%), the

Netherlands (20.0%), Australia (23.8%), and Germany (21.1%). These shares are

rather steadyalready for some time and shownodrastic swings (IMF, 2000).

Figure2-4showsthecontributionofeachmajoreconomic sectorintotal GDP

duringrecent years.Notice thattheservice sector in Iranis large.

Government policy

One of the most difficult points to discuss here is the development

of

government

policy inIran.Aftertherevolution of 1979andduringthe_{Iraq-Iran war (1980-1988)}

the economy of Iran hasactuallybecomeacentrally planned one. This had lead to a

very complex situation in which almost all aspects ofthe economy were/are run by

the state, and this is certainly the case fortheenergysector. Withtherevolution, most

privately owned banks and energy companies werenationalized, as weremany other

activities. Almostten years after the revolution, by the end ofthe Iraq-Iran war, the

Iranian_{economy was, by international standards, in a very} bad condition. Imports,

exports, and most other activities depended on a complex system

of

government

approval, and the _{prices of most basic goods were heavily} subsidized. The state

control of

the economy did, however, have several positive effects also. Social

indicators, such as poverty reduction and the

closing of

the gender gap, have

improved considerably andIran serves asanexample to comparable _{countries (World}

Bank, 200 la).

Immediately

_{after the end of the war,}

Iran developed its first five-year

development plan (FYDP)toimproveits economy, and has beenworking on this ever

since.In March 2000the parliament accepted thethird FYDP. We willnot discuss all

problems, but only listthoserelevant forour research:

• In the pasttheIraniangovernment has used upto twelvedifferentexchangerates

forvariouscategories

of

goods. The exchange rate foran_{imported good was (and}

inmany cases still is) set by the government,based on its view onthe strategic

importance of the good. In recent years only three exchange rates (see below)

were used, and in 2002Iranswitched-inprinciple- toonemarketbasedexchange

rate.

• There aremany

tariff

andnon-tariffbarriersforimported goods. The government

has made alist

of

items that canbe_{imported relatively easy.}

• Exportsarebound byforeign_{exchange rules,}minimumprices forexported goods,

quality regulations, and licensing.

• Many domesticgoodsareeitherexplicitly or implicitlysubsidized. Theamount of

(implicit)subsidies,althoughdifficultto estimateexactly, amount to more than 15

• Statecontrol overthe prices ofmany goods has lead to continuouslydecreasing

real prices.

• Las but not least, to finance many ofthepolicies,the increase in liquidity in Iran

has been as high as 30%peryear,leading to double-digit inflation rates as well.

All this hasresulted inaneconomythatdepends more than anyotheron government

policy decisions and on state control. It is certainly not a textbook economy and

cannotbe treated assuch. Given the goal of this research, which is toprovide insight

intothe possibilities

of

domestic energy policyanddomestic energy saving, we will

not aimatprovidingcompletedescription ofthetotaleconomy. Forthisresearch we

will not trytomodelthetotal economic structure, but we will only buildadescriptive

model of Iran's domestic energy sector, augmented with a limited number of

macroeconomicrelations;see_{Chapter 6.}

2.3 The roleofenergyin

Iran's

economy

Inthissection the role

of

energyinIran's economyisdiscussed ingeneralterms. The

basket

of

primary_{energy reserves, the}transformation

of

energy fordomestic use and

the losses of

the transformation-sector, energy intensity, as well as energy consumptioninvarious sectorsare_analyzed.

Primaryenergy reserves in Iran

Based on the latest availableinformation, the oil in placereserve in Iranis about 425

billionbarrels,

of

which 89.4billion barrels is recoverable_{in primaryand secondary}

production; that is, with 90% certainty this amount of oil can be recovered using current technology (this is also called _{proven reserves). The average} oil recovery

factor is about 21% of the total reserve. With the current level

of

technology,

production-reserveratioisabout65_{years(Ministry}ofEnergy, 1999). Thisamount of

oil reserveisequal to 8%ofthe worldreserves and 10%ofOPEC'sreserves.

Iran's recoverable natural gas reserves are about 24.5

trillion

cubic meter

(TCM) or882

trillion

cubic feet (TCF). This isequivalent toabout 148 billionbarrel

of crude oil. Withthe currentlevel

of

productionand technology, Iran's

Apart from oil and gas, Iran also has

a _{large potential}

of

other energy resources:

•

Totalreserve of coal is estimated at12.7billiontones.

• Iran's hydroelectric potential is morethan 42,000 megawatt.

of

which only 4.7%

is currently used.

• Iran's solar energy potential is estimated to equal 130 billion

barrel of oil

equivalent.

• The potential for windenergyisabout6,500 megawatts.

Energyproductionand consumption

From 1974 to 1998 the consumption

of

primary energy has increased more than

458%, from 142.4 to795.1 million BOE, final_{energy demand increased by the same}

percentage, and the demand by the primary energy sector by including the losses

462%. The mainprimaryenergiessupplied tothedomestic marketarecrude oil and

natural gas, but alsosome hydroelectricity, solid fuels, non-commercialenergies, and renewable _{energies such as wind} and solar are used. Next we discuss all _energy

carriers used in moredetail.

Crude oil

Iran's crude oil production capacitywas about 6 million barrel per daybefore the

Islamic Revolution of 1979. After the revolution, crude oil production decreased

reaching its lowest level of 1.28 million barrel per day in 1981. The production

capacity in 1998 was 3.84 million bbl/d, and the_{daily averageproduction was 3.73}

millionbarrel. Figure 2-4 depicts thetrend ofoilproduction from 1974 till 1998 and

shows that a sharp drop in production occurred after the revolution, which was

amplified bythe_{Iraq-Iran war.}

Iranian experts believe that maintaining a production capacity

of

almost 4

million barrels per day intheyears to come will be difficult. To keep this production

level, Iran has to invest much, particularly in gas injection projects to raise the

pressure

of

dyingreservoirs. _Achieving a_higher level

of

_{productioncapacity is only}

possible when aconsiderableamount ofhard currency is investedinthosefields that

are _{currently producing, and in} the _{development of} new fields. However, such a

policy would be at oddswithIran'sOPEC quota,which does notevenpermit the use

currently because

of

quota limitations, it can play a critical role in a time of OPEC

supply shortage. The latter provides an opportunity to recover the costs

of

excess

capacity and make a _{profit. For example, the cut in Iraqi production because of}

politicalproblems and thereduction in Venezuela's production offered members with

excess capacityto profit fromthehigher prices

7

6

S s

4

28 3 ',! ''-C _{.: : ..; .':1344*U' . 1, :i; i.1.:!.}

O ; - - ··;11 ---· '

/ 2 ...

·t__il--0

41 49164& 49f4900400A4906490040004090400Aigg64900

0 production 0Domestic demand

Figure 2-4.Oil production, domestic demand for oil, andoilexport

Figure 2-4 shows that the amount

of

crude oil supplied to meet domestic

demandhas_{grown from}0.32 million_{barrel per day in 1974 to} 1.21 million in 1998.

The average annualgrowth rate ofthe domestic demand for oil from 1974 to 1998

was 5.56%. However, its share inthedomestic energy basket has come down from

81.95% in 1974 to 55.72% in 1998 due to the gas for

oil substitution policy, especiallysince_{the early nineties;}see_{Figure 2-5.}

As shown in Figure 2-4the domestic consumption

of

crude iscurrently about

33% of production, and thisshare isincreasing, threateningtheexportof crude oil and

thus Iran' s main opportunity to earn hard currency. So without a change in Iran's

domestic _{energy policy,} a further decrease of oil available for _{export should be}

100%

--Fll , Fl-M77-11- 7777177 Frrff

_{4 4 I i-f#f i t& $9 3'f i f t.t' " · % #f f f}

80% --- ' 1-L-1-2 4 .. .''I 4 5.' f. 1. / 4 4

-22#*.f#ff,

ti:.44£.f

60% - - - - - - - - ----t

im#fi

40% 20%

-0%

4, *da 40* idp 407 49' idp 749 74p i#P 4," 449 idp

0 Oil 0 Gas•Others

Figure2-5. Shareofthe_{main energy carriers inIran's primaryenergy basket}

Natural gas

Since Iran has abundant natural gas reserves (24.3 TCF which is 15.8% of world

reserves and 1.65 time more than its proven oil reserves), a major change in the domestic energy market over the lastdecade has beenthe replacement ofoilproducts

by natural gas. This

policy will

be continued in the future, because it has many

advantages. First, itincreases the amount

ofoil

availablefor_export.

Ifwe

assume that the share

of

crude oil in Iran'sdomesticenergy supply would havestayed at 82.7%,

thiswould requireabout 50% of the OPEC quota for_{Iran. Second, the use}

of

natural

gas is more energy_{efficient in refineries when transforming crude oil into petroleum} products, andpowerplants based on _{natural gas areon average more efficient also.}

Third, natural gas is less emitting in terms

of

greenhouse gasses than oil products.

Finally,oneshould keep in mind_{thatnatural gas is moredifficulttoexport.Investing}

in international gas infrastructure faces many political problems, because the gas

pipelines have tocross several borders. This is _{especially true for Iran, which is a}

difficult part of

the world from a political point of view. LNG on the other hand

requireslargerinvestments than theinternationaloiltrade does.

Iran hastried (and will try)to export its natural gas. Iranian gas is currently

exportedto Turkey, which isan interesting market. _{However, Turkey} has contracts

with _{other neighboring and gas producing countries also. From a Turkish}

view this increases the certainty

of

supply. This also shows that there is tight

competition in this regionbyIran's neighboringcountries.

Iran had a_{contract with the USSR also, but this contract has} been canceled

afterthe collapse of the USSR. Asaresult, the best way for Iranto utilizeits natural gas reserves is by domesticconsumption while tryingto extend its share in regional

foreignmarkets. Finally,manycountries in theregion tryto export theirnatural gas,

whichmeansthere ismorecompetition onthemarket for gas than onthemarket for

oil. Russia, Azerbaijan, Turkmenistan, Qatar are among the countries in the region

that would liketo export their gas to thesamemarkets as Iran, i.e. Turkey and then to

Europe, Pakistan, and India.

Theprimaryconsumption

of

natural gas in 1998 (336.9 MBOE) is 21.6 times

that of 1974 (15.6), this isan averageannualgrowth of 12.8%. Forthe period

1988-1998 this growth rate is evenbigger, 15.5%. Asa policy it was decided in 1998 to

expand the domesticusage

of

natural gas. Asaresult theshare

of

natural gasin total

primaryenergy demandhasgrown from 19.3% in 1988 to 42.4% in 1998.

Despite thehighshare

of

natural gasin Iran's primaryenergy basket, theshare

of oil

in total energy consumptionis still high. This is one ofweakpoints inIran's

energy supply,improvementofwhichthisresearchistryingto analyze.

Otherenergy resources

Currently the shares

of

hydroelectricity, solid fuels (mainly coal), and other fuels

(non-commercial fuels as wood and charcoal), in Iran's total primary energy

consumption are 1.3%, and 1.90%_{respectively. The}share o

f

renewables is negligible.

In general Iran's hydroelectric power is directly connected to the overall electricity

grid; only insomeisolated areas itisconsumed _{locally. Major}consumers of coal are ironandsteel_{manufacturers. Wood, charcoal,}animal_{and plants wastes are used only} inremoteruralareas,mainlyashousehold fuels.

Losses and fueI use in the_{primaryenergy sector}

Primary energy supplied into the domestic energy sector has to be transformed into

energy that can be used by end users. Refineries produce petroleum products and

power stations produce electricity. These final energies have to be transmitted or

transported to the final consumers. Transformation and transport themselves use

certainly compared to state of the art processes, but also to other countries. The

difference between total primary energy _{demand (TPED)} and total final energy

demand (TFED) givestheamount of own energyconsumptionand energy losses of

the energy sector; seeFigure 2-6. Thisamount hasincreased from 30.7million BOE

in 1974 to 172.6million BOE in 1998, indicating an annual 7.2% growth rate. The

ratio

of

total own consumption in the energy sector in 1998 as apercentage

of

total

primary energy consumption is 21.7%, indicating substantial

potential for

conservation 900 800 700

_A-*

t--ul ₆₀₀

-i

2

500

,/.

400

/*x Air.*r

'E 300 200 100 0 I. . . . .I. . . ,i. . . . .1. " . ,

i.iblei*4010449444#4#,4494/*##*.#P,#P

UTFED EZZ]Loss& fuel -*-TPED

Figure2-6.Totalfinaland_{primaryenergy}demand; loss and fuelofenergy sector

The power sector is responsible for the

major part of its

own energy

consumption in the primary energy sector. With the development ofthe domestic

electricity market in combination with the low electricity prices the sector's energy

losses haveincreased. Asa percentage ofthetotal own energy consumption by the

powersectorhas_{grown from 38.8% in 1974 to 55.0% in 1998.}

Final_{energyconsumption}

Total final_energy demand in 1974wasabout 111.7 MBOE or0.31 _{MBOE/day; see}

Figure 2-7. Withanannualgrowth rate of 7.2% ithasreached to 622.5 MBOE or 1.7

MBOE/day in 1998. Petroleum products, withashare of81%, covered the main part

ofthis

demand in 1974. Theshare

of

_{natural gas}infinal _{consumption was only 17%}

in that year. The share

of

petroleum productshasdecreased to 55%, whereas the share

of natural gas has

increased from to 35% in

1998, indicating once more the

considerable changes in Iran'sfinal energybasket

700 -600 --. = W 500 - - -I

O -:57:1

m

400

_-715*:iIi

2 300

- -11

E 200

-B#ft. 16:- 1

100 --M-A-ri-1

-...„ 9-'- -1---1

f ,4,4,4,4,1,1,4,4,4,

0_{petroleum products} 0_{natural gas} 0electricityIsolid

Figure2-7.Finalenergy demand and itsmaincomponents

The average annual growth rate

of

petroleum productswasabout 5.58% over the time period 1974-1998. At the same time, natural gas has grown at a rate of

13.26% per annum.Electricitydemand has increased by 8 91% per year,coming from

9,152 million kWh (5.8 million BOE) in 1974 to 77,646million kWh (48.9 million

BOE) in 1998.Thesmallest share (2%) is that

of

solidfuels.Figure2-7 shows that the

petroleumproducts and natural gas meet themajor part

of

Iran'sfinalenergy demand

(about 90.1_{%) So hydrocarbon} energies cover more than 90%

of

Iran's total final

energy demand.

Energy demandin variouseconomic sectors

Figure2-8 showsfinal energydemand by themaineconomic sectors in 1998. With a

share of 36% theResidential & Commercialsector is the largest consumer

of

energy.

TransportandIndustry aretwoothermajorconsumers, responsible for 25% and 24%

respectively. The agricultural sector is the smallest consumer

of

energy. In the followingthedetailsofeachsectorarediscussed.

Remark: Unfortunately, theenergy usage data pereconomic sector are

not available forthe_{total period}andthese data are notreliable; alsoseeSection 5.4.

Next,we discuss the energyconsumption ineachsector in more detail.

Coll IWI 1096 6% r - A-"/il ./ "--=rd

38%

1-1. \ Transpcrt 25% h-,aistry 24%

Figure2-8. Shares

of

final_energyconsumption by economicsector in 1998

Residential& Commercialsector

Annual finalenergyconsumption bytheResidential & Commercialsectorhasgrown

on average by 7.8%, from 34.1 MBOE in 1974 to 222.3 MBOE in 1998. Theshare of

petroleum products was 85.1% in 1974 and that

of

natural gas 0.25%. In 1974 the

share

of

_electricityand solid fuels were 8.5% and 6.1% respectively. As Figure 2-9

shows thefuel basket for thissectorhaschanged drastically. Natural gashasreplaced petroleum products especially since 1990. The annual growth rate

of

natural gas

demand duringthe period is 28.9%while forpetroleum products this is 54%. The

main_{portion ofthe gas is used}forheating andcooking.

250 200 W 150 2 100 ' 1 :,1 ' ' 2 M: 9, : 11, '1 1 11'4340 ,'EM : 1 , 50 4*'I, 1, 4Il 1 t, ,I 11 '1 1113':4 1111,111111,11' 11 111 ,1111111'1 1111,11 1111111 11,1 11111'1111111 1 1,11 0,5. • • • , • • • • • • • • • 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 0_{Petroleum products} 0Natural gas ISolid 0_electricity

Transportsector

This sector is the second largest consumer

of

final energy. The consumption of the

transportsectorhasgrown from 26 MBOE in 1974 to 155 MBOE in 1998,anaverage

annual _{growth rate of 7.3%. As} onewould _{expect, almost all consumption of this}

sector is in theform ofpetroleum products,althoughinrecent years some vehicles use compressednatural gas (CNG), and LPG. Insomeurban areas, suchas_{Tehran, some} electricity is usedforelectrifiedtrains, but the data on this usage are not available.

160 --140

ire:'.

120 _{.,-&: » I} LU 100

-

-L%--g 80 HE 60 40 20 -0 · · , , , , , , , , , , , , , ' t , , , , ' ' , I ,

$6491#1494,4#F#444*idf*d#44* %),df

0Petroleum Products 0Natural gasISolid 0Electricity

Figure 2-10. Fuel mix in Industrial sector

Industrialsector

Theindustrial sector isthethirdlargest

of

energy user in Iran, withashare of 24% in 1998; seeFigure 2-8. The average growth rate

of

final energy use in this sector was

6.5% within 1974-1998. Total _{energy consumption was 31.8 MBOE in 1974 and}

reachedalevel of 150.9 MBOE in 1998,

As shownbyFigure 2-10, incontrast totheResidential

&

Commercialsector,

the main energy carrier ofthissector is natural gas, witha share of 50.7% in 1998.

The shares

of

petroleum products, electricity, and solid fuels are 33.3%, 10.7%, and

5.3%, respectively. Compared to theother sectors the share

of

electricity in energy

consumption oftheIndustrial sector is large

Agriculturesector

Finalenergyconsumption intheagriculture sector was 6 MBOE in 1974,which with

anannual growth rate of7%,reached to 32 MBOE in 1998. Theshare of this sector

has always been less than 6%

of

total finalenergyconsumption. Petroleum products

has always been less than 6%

of

total final energyconsumption. Petroleumproducts

cover about 87.7%

of

total final energy used in this sector, while the remaining

demand (12.3%) is met byelectricity.

Otherfinalenergy use

In Figure2-8 about 10%

of

total final_{energy is}consumed inmiscellaneousactivities

titledas_{"other", which include petrochemical consumption, and} some otherenergy

and non-energy use.

In conclusion,the largest consumer

of

final energy isthe Residential

&

Commercial

sector, with a considerable capacity to replace petroleum products by natural gas.

With a good pricing policy CNG can be economical in the transport _sector, which

offersa tremendousopportunityto conservepetroleumproducts. Although the share

of natural gas in industry is high, there still is room for natural gas replacement at

affordable_prices.

Energyintensity

The amount

of

_{primary (or final) energy used per unit GDP is}animportantandoften

used indicator forthe energyintensity ofaneconomy. Although this indicatorshould

be used with care, it can be used to compare _{economies (Sun, 1998) and for}energy

professionals hasadistinctive informationalvalue.We calculatedthe energyintensity

basedon_{total primary as well}astotalfinal_energy;see_{Figure 2-11.}

As the figure _shows, Iran's primary energy intensity has grown from 13.1

BOE peronemillion Rial of GDP(at constant 1982_{prices) in 1974, to 39.2 in 1990,}

and reached 46.6 BOE in 1998. _{The annual average growth rate}

of

_{primary energy}

intensity overthetotal_{period was 5.3%. Despite some}fluctuationsin_{recent years, the}

trend in energy intensity hasbeen upwards. The energy intensity

of

based on final

energy was 10.3 BOE per million Rial of GDP in 1974 and 36.5 in 1998, so the

growth rate was the same as that

of

primaryenergy demand.

Inthetransportsector the energyintensity was 45.1 BOEpermillion Rial real

grossvalueadded (GVA) in 1974 and grew to 146.3 BOEpermillion GVA in 1988,

butimproved after theending of the warto reach 118.6 BOE in 1998; seeFigure

2-12. This sector is by far the most energy intensive one. The average annual growth

50

-a #r#*--a--0

840

n.-·g la T, r - - 4('0

30 ISS/+0 -

0 E 20

810

CI] 0 ) , , , • I

41*49160104/ 4994#t 4,4,4/ 444, 44* 4/

-0-Primary -Final

Figure2-11.Energyintensitybased onprimary andonfinalenergy demand

E 160 N 140 3 120 'n-*--r:r n.-m\ /m 3 100 80

i 60 _ .'- "5 J-XY

-*+-*-*-*--*-

6 4-V-*--*--K*.-/&

40

Piy-J 20

2 0 + 0-2,;1.6.0.t.*7+7+...4.*.'.S,$.0,'.6,3.*.t-*70

4 ** 4,4 4,4,4,4,4 ,4,4,

-Transportation -Industry ·-Agriculture

Figure 2-12. Finalenergyintensity

The energy intensity ofthe industrial sector shows a different trend. The

overall annual average growth rate was 1.4% over the evaluation period 1974-1998.

Inrecent years the intensityevenshowsa downwardtrend, mainlybecause

of

Iran's

improvedeconomicsituation due to highoilprices.Figure2-12clearly shows that the

Iraq-Iran war resulted in an upward trend. During the war Iran's industry worked

around 50% ofitsnominal capacity due to lack

of

funding,especially hardcurrencies

(which were historically injected by the government into the industrial sector at

favoriteexchange_{rates), and the lack of(raw)} materials. After the war idlecapacities