Middle East > Iran > Iran Energy Profile 2012

Iran: Iran Energy Profile 2012

2012/03/14

 

 

 

Iran Energy Profile 2012

Petroleum and natural gas are Iran's principal mineral resources. Iran has between 5 and 9 % of the world's petroleum reserves and has long been of the world's leading producers. Natural gas reserves are second only to those of Russia, but production is still relatively low. Crude and refined petroleum account for most of Iran's foreign exchange. Production is mostly from wells in or near the chief of the Persian Gulf. A lot of other minerals, including coal and ores of iron, chromium, copper, lead, and zinc, are beginning to be mined on a large scale.

Despite a fourfold increase in oil prices over the past decade, the world has absorbed the price hikes with relatively little disruption due to fundamental changes in the workings of the world economy, and the use of macroeconomic policy to mitigate the effects of rises.

 

During the current economic downturn, the price of oil hit over $100 a barrel, and prices rose close to levels only seen in the 1970s. But the increases have not triggered world recessions as they did in the 1970s and 80s.

In new research, IMF economists attribute this resilience to underlying factors:

1. Stronger demand

The reason for the current price hikes differs from the past. Increases in the 1970s and 1980s were caused largely by sharp disruptions to world supply. In contrast, a prime reason for the increases since 2000 has been stronger-than-expected request from emerging market economies.

The strong increase of emerging markets has benefited both them and the world economy: raising living standards and increasing their request for products made abroad.

A side-effect of this may have been an increase in oil prices, but this has not derailed the benefits of increased increase.

2. Central bank policies

Central banks and economies have become additional adept at dealing with price shocks. In the 1970s and 1980s, oil price rises triggered fears of inflation, and workers would try to protect themselves by demanding higher nominal wage increases. This had the effect of setting off wage-price spirals.

Now, better awareness of the impact of high wage increases—including lost employment and reforms to labor markets—have led to additional job-friendly wage setting. Central banks have become additional adept at convincing workers that oil price increases will not feed through into inflation.

Today, headline inflation temporarily increases after an oil price increase, but nominal wages hardly respond. Workers have grown to expect this rise in headline inflation, and expect that it will be temporary.

Given the experience of the past, additional recently a lot of oil-importing economies with strong central banks have experienced little impact on core inflation and wage increases, despite oil price rises.

This has allowed central banks to be additional supportive of promoting recovery in the economy after an oil price increase, rather than having to raise interest rates to dampen inflationary expectations.

3. Recycling the benefits of oil profits

The revenues from oil exports are flowing back to oil-importing economies. This helps bring down interest rates for households and firms, and so supports investment and increase in these economies.

4. Better efficiency

Oil price shocks do not have the same impact as in the past because economies have become additional efficient in the use of energy. The amount of energy it takes to produce a dollar of income has been steadily declining for 40 years. This decline in energy intensity is expected to continue.

Major emerging markets are as well becoming additional efficient in the use of energy, and they are expected to continue to make efficiency gains. By 2030, the major regions of the world—the United States, China, and India—are projected to have the same energy intensity.

5. Diversification

Nations have increasingly diversified their energy sources over recent decades. They import energy from a lot of additional places than in the 1970s. They as well use additional varied forms of energy. This makes them less vulnerable to disruptions from any supplier or source of energy.

The United States, for example, buys crude oil and gasoline from additional than 40 nations and jet fuel from additional than 25 nations.

Nations have as well increased their use of natural gas, and are importing it from a lot of additional nations. Norway has continued to grow in importance as an exporter of natural gas, and several new producers have emerged, including Qatar, Turkmenistan, Nigeria, Egypt, and Australia.

By 2030, it is expected that energy use will be even additional diversified. Oil, coal, and gas are predicted to each have a 30 % world market share, with hydro, nuclear and renewables accounting for the remaining 10 %.

Oil supplies remain a concern

Despite the reduced impact of high oil prices in recent years, large, abrupt price changes remain difficult to absorb, particularly if they come from supply disruptions. Recent geopolitical developments offer plenty of examples of such disruptions.

Recent supply shortfalls have been smaller than in the 1970s, but the potential for larger disruptions cannot be ruled out.

Over the short term, concerns center on Iran, the fifth major world producer and third major exporter. Supply from Iran is expected to drop during the second half of this year, in response to international sanctions.

It is unclear how this will affect oil prices, but it is likely that market prices may expect the impending drop in supply to some extent, while other producers may react by increasing output. Saudi Arabia has already increased production to a 30-year high in response to recent disruptions.

The impact of supply disruptions

The effects of major supply disruptions can be particularly damaging under current conditions because there is limited spare capacity to increase oil production, and inventory levels in importing nations are low.

This will compound the difficulties facing a lot of households already reeling from the financial crisis, with higher prices for gasoline and heating oil adding to the pain inflicted by high unemployment and low wages.

Fears of oil scarcity—the worry that the world will simply run out of oil—as well loom large in the minds of a lot of. A recent IMF Working Paper suggested that some of the gyrations in oil prices in recent years have come about because market participants appear to give some credence to this geological view of binding constraints on oil supplies.

Next supply disruptions may turn out to be costly not just because of the immediate loss of oil supplies, but because of the fears they trigger about a additional permanent loss.

Response of oil suppliers

The response by oil suppliers to higher prices has been slow despite a lot of years of rising and high prices. Bringing additional oil capacity to the market remains a challenge for various reasons including geology, geography, technology, and regulation.

But, provided oil prices increase fairly gradually in response to scarcity, the developments of the past decade suggest that the world economy should be able to cope without major output losses, as noted in the April 2012 World Economic Outlook.

Higher oil prices will raise the cost of fertilizers, and thus the cost of food. This effect has already taken place over the past decade. It raises special challenges for the poorest economies.

Some of these economies have become major oil exporters and have less need to worry. But others may require help. Most of these economies will need to build up their social safety nets so that they can reach those most in need.

Liquidity trap?

Simulations of the IMF’s large-scale models show that oil supply disruptions would reduce increase in the United States and Europe, an unwelcome prospect given already weak conditions in those economies.

An additional worry is that even oil price increases due to stronger request from emerging markets may have negative, short-run effects in the current climate as the increased incomes and savings of oil exporters from the higher prices are not recycled immediately or fully into increased request for goods produced by oil-importing nations.

Under normal conditions, the higher savings in oil exporters would as well tend to lower world interest rates, in turn boosting the interest-sensitive components of request in the oil-importing nations.

But in the current situation, where world interest rates are low, increased world savings are of little help, and oil price spikes would be even additional unwelcome. The recycling of oil revenues does not work inclunding before.

But a lot of oil exporters are spending an unusually large amount of their revenues on imports of goods and services to improve social conditions in their nations, helping themselves and the world economy.

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