Iran’s Oil Production Woes

From the IHT:

Iran actually is short of oil By Roger Stern Iran has ensnared itself in a petroleum crisis that could drive its oil exports to zero by 2015. While Iran has the third- largest oil reserves in the world, its exports may be shrinking by 10 to 12 percent per year. How can this be happening? Heavy industry infrastructure must be maintained to remain productive. This is especially so for oil, because each oil well’s output declines slightly every year. If new wells are not drilled to offset natural decline, production will fall. This is what is happening in Iran, which has failed to reinvest in new production. Why? For the mullahs, the short-run political return on investment in oil production is zero. They are reluctant to wait the 4 to 6 years it takes for a drilling investment to yield revenue. So rather than reinvest to refresh production, the Islamic Republic starves its petroleum sector, diverting oil profits to a vast, inefficient welfare state. Employment in the loss-making state-supported firms of this welfare state is essential to the regime’s political survival. Another threat to exports is the growth in domestic demand. Iranian oil demand is not just growing, it’s exploding, driven by a subsidized gasoline price of about 9 cents a liter. This has created a 6 percent growth in demand, the highest in the world.

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