Iran Has Home Front Problem

Iran has a problem on the home front. An economy that is not producing much of anything. Especially jobs.

Iran Press News published photos of thousands of hungry workers in the province of Mazandaran (Caspian region of Iran) protesting while Ahmadinejad traveled to that area. Frustrated people chanted slogans about joblessness, destitution. Ahmadinejad was forced to stop speaking several times.

The pictures at the above link show some very unhappy folks with signs asking about jobs and questioning Ahmadinejad's support for the poor.

That is not the only economic problem Iran is having. Oil output is declining rather rapidly.

Iran has a surprising weakness: Its oil and gas industry, the lifeblood of its economy, is showing serious signs of distress. As domestic energy consumption skyrockets, Iran is struggling to produce enough oil and gas for export. Unless Tehran overhauls its policies, its primary source of revenue and the basis of its geopolitical muscle could start to wane. Within a decade, says Saad Rahim, an analyst at Washington consultancy PFC Energy, "Iran's net crude exports could fall to zero."

That's not to say Iran doesn't have abundant resources. The country's 137 billion barrels of oil reserves are second only to Saudi Arabia's, and its supply of gas trails only Russia's, according to the BP Statistical Review of World Energy. Getting it all out of the ground, though, is another matter. Iran has been producing just 3.9 million barrels of oil a day this year, 5% below its OPEC quota, because of delays in new projects and a shortage of technical skills. By contrast, in 1974, five years before the Islamic Revolution, Iran pumped 6.1 million barrels daily.

The situation could get even tougher for the National Iranian Oil Co. [NIOC], which is responsible for all of Iran's output. Without substantial upgrades in facilities, production at Iran's core fields, several of which date from the 1920s, could go into a precipitous decline. In September, Oil Minister Kazem Vaziri-Hamaneh suggested that with no new investment, output from Iran's fields would fall by about 13% a year, roughly twice the rate that outside oil experts had expected. "NIOC is likely to find that even maintaining the status quo is a mounting challenge," says PFC Energy's Rahim.

What is the cause of the decline in ouput despite abundant resources? Politics.

Iran's looming crisis is the result of years of neglect and underinvestment. As in other oil-producing countries such as Venezuela and Mexico, the government treats the oil industry as a cash cow, milking its revenues for social programs. It allocates only $3 billion a year for investment, less than a third of what's needed to get production growing again.

Compounding the pressure are policies that encourage profligate energy use. Gasoline prices are set at 35 cents a gallon, which has helped fuel 10%-plus annual growth in consumption, PFC Energy figures. The national thirst for gasoline far outstrips domestic refining capacity, so Iran will import about $5 billion in gasoline this year, or about 40% of its needs. The government is planning a $16 billion refinery building program to boost capacity by 60%. But unless Iran raises fuel prices, the new plants will just mean more consumption.

An oil squeeze could spell trouble for President Mahmoud Ahmadinejad. The populist leader has won backing at home through generous handouts. Ahmadinejad has ratcheted up public spending this year by 21%, to $213 billion, on everything from aid to rural areas to housing loans for newlyweds. He has also promised some $16 billion in outlays from a special $30 billion fund set up to tide Iranians through future hard times. Without a healthy oil sector, Iran's social spending could bust the national budget--and reignite inflation.

Actually they already have an inflation problem which is running at 10 to 15% a year currently.

Spengler nails it:

In programs made public on August 15, Ahmadinejad revealed a response worthy of Adolf Hitler or Joseph Stalin to the inevitable unraveling of Iran's traditional society. He proposes to reduce the number of villages from 66,000 to only 10,000, relocating 30 million Iranians. That is a preemptive response to the inevitable depopulation of rural Iran, in keeping with a totalitarian program for all aspects of Iranian society.

As Amir Taheri wrote in Arab News on August 20, "He [Ahmadinejad] wants the state to play a central role in all aspects of people's lives and emphasizes the importance of central planning. The state would follow the citizens from birth to death, ensuring their health, education, well-being and leisure. It will guide them as to what to read and write and what 'cultural products' to consume so as not to be contaminated by Western ideas."

Reengineering the shape of Iran's population, the central plank of the new government's domestic program, should be understood as the flip side of Iran's nuclear coin. Aggressive relocation of Iranians and an aggressive foreign policy both constitute a response to the coming crisis.

Iran claims that it must develop nuclear power to replace diminishing oil exports. It seems clear that Iranian exports will fall sharply, perhaps to zero by 2020, according to Iranian estimates. But Iran's motives for acquiring nuclear power are not only economic but strategic. Like Hitler and Stalin, Ahmadinejad looks to imperial expansion as a solution for economic crisis at home.

The Iranian economy is screwed. Socialist principles and oil wealth have destroyed it. Their only hope is expansion or death.

Iran covets the oil reserves of southeastern Iraq, southern Azerbaijan, and northwestern Saudi Arabia. With 30% youth unemployment, 10% inflation, epidemic prostitution and drug addiction, Iran's fraying social fabric depends on an oil-derived government dole. Within a generation it will have half as many men of military age, and four times as many pensioners. As currently configured, Iran faces economic and demographic collapse eventually. If, as Business Week reports, Iran's oil exports are falling by one-seventh each year, the reckoning might come sooner rather than later. The theocratic regime is a wounded and dangerous beast, prone to hunt outside its own preserve.

Unfortunately the whole Middle East is infected with the socialist disease. Which looked like a good deal when oil revenues were large compared to the population.

Business Week looks at the business climate in Iran

Business confidence in Iran has been flagging since Ahmadinejad won the presidential election a year ago. Industrialists are dismayed because politically, the President has taken Iran back to the bad old days of confrontation with the West. At the same time, his economic and fiscal policies have proved to be an incoherent hodgepodge. Ahmadinejad pours 6% of gross domestic product into subsidies for food, fuel, and other essentials, a move applauded by ordinary citizens. But a near-50% boost in the minimum wage last winter made it tougher than ever for Iranian factories to compete against Chinese imports. That forced substantial layoffs, adding to double-digit unemployment, now at 14%.

DEEPENING DISARRAY
Before Ahmadinejad's election, Iranian private business was ready to ramp up investment. Now money is flowing out of the country, as evidenced by the 30% fall in the stock market over the past 18 months. Foreign business interest has also cooled. BP PLC, which wanted to be a big player in Iran, says it isn't looking for new business in the current climate. Banking giant UBS says it has stopped doing any business with Iran-based customers.

Even the oil industry has seen its share of troubles. Although Iran remains the No. 2 OPEC producer behind Saudi Arabia, it has struggled to maintain its 4 million barrel per day production. Purges of the oil bureaucracy have deepened the disarray. An award of a $2 billion gas development contract to the engineering arm of the Revolutionary Guards sparked criticism that Ahmadinejad, an ex-Guard, sought to reward his buddies for their support.

That is always a problem. Who do you want in charge of the oil industry? The politically reliable or people who can actually produce oil?