Iran to Cut Oil Subsidies in Energy Reform

Reform should remove distortions and restore efficiency in the economy

Aim is to export more oil and thus generate more revenue

Government to redistribute to the people the additional revenue earned

With the removal of subsidies on oil and gas, domestic demand for energy in Iran is expected to decline, leaving more energy resources available for export. If all goes according to plan, the strategy should serve the dual purpose of generating more revenue for the country and curbing the wasteful use of energy, IMF mission chief Dominique Guillaume and Senior Economist Roman Zytek told the IMF Survey online.

The country’s energy price reform comes at a time when the United Nations Security Council and a number of countries are imposing economic sanctions targeted at Iran’s nuclear program.

In an interview, Guillaume and Zytek spoke about the reasons behind Iran’s upcoming energy price reform and the benefits it could yield.

IMF Survey online: Can you paint a picture of the Iranian economy today?

Guillaume: Iran is the 17th largest economy in the world. Holding little foreign debt—less than 7 percent of GDP—the country has sizeable energy reserves, with underground hydrocarbon resources estimated at $10 trillion in oil alone (at $75 a barrel) and natural gas reserves at between $3½-4½ trillion.

Real GDP growth is estimated to have been about 1-2 percent this year. This relatively low GDP growth is due mainly to weak domestic demand, since Iran’s integration with global financial markets is limited. Inflation has declined dramatically—from close to 30 percent two years ago to less than 10 percent since September 2009 as the central bank withdrew liquidity. This lower level of inflation provides a good foundation for the energy price reform. Eliminating energy subsidies means that the Iranian people will see an increase in prices, so it’s important to have low inflation to start with.

IMF Survey online: Why are oil and gas subsidized in the first place?

Zytek: The government believed, at one time, that subsidies were the best way to distribute national wealth. The price just had to cover the cost of extraction. This was less of an issue when the international prices were low, and the price differential between the extraction cost and the international price was small. But this is no longer the case. International prices for oil and gas, especially oil, have surged, reaching almost $150 per barrel in 2008, and the extraction cost is a...