The downsides of subsidising energy

Starter for 10: Which is the world’s third largest natural gas consuming country?

Iran (the top ranks are held by the US and Russia. China relies more on its huge coal reserves).

The striking answer is a clear illustrates the effect government subsidies can have on consumption. From 2000 to 2008 marketed gas demand grew at an average annual rate of 9 per cent, pushing Iran’s gas needs from 62bn cubic meters (bcm) to 122 bcm in eight years. The country’s own production has not been able to keep up. Together with Qatar, Iran sits on the world’s largest natural gas field, yet it is a net gas importer, bringing in volumes piped from Turkmenistan and Turkey.

IHS Global Insight says things are about to get worse:

This winter season, the gas shortage is expected to be greater than before as Iran has failed to bring enough new capacity onstream and to its populated areas, forcing it to buy additional volumes at a higher price than before from Turkmenistan, adding to the government’s sense of financial urgency.

Iran has since 2000 made bigger additions to the production capacity of South Pars than those made to the North Field, the portion of South Pars that lies on Qatar’s side of the border, the International Energy Agency, the rich countries’ watchdog, in its recently-released World Energy Outlook.

But that is easily overlooked because, unlike Qatar, Iran’s gas does not hit international markets. Instead, more and more of it is being injected into the reservoirs of Iranian oil fields that are aging and need more pressure to keep the oil flowing.

With oil prices far higher than those of natural gas, Iran’s use of its gas makes sense. It’s a good thing too, because Iran is also suffering runaway oil demand. Why?

Subisidies.

Iranian motorists can buy 100 litres of petrol each month at 1,000 rials (about US 10c) per litre. That is usually more than enough to cover their needs. In case they run out, Iranians can still more at four times the price. Taxi drivers get a higher allocation.

But those subsidies are getting rather too heavy to bear and Tehran is again mulling their reduction.

Here is IHS’s analysis:

The discussion of imminent quota cuts shows how desperate the Iranian financial situation is, with the Islamic Republic still having to import about 40 per cent of its petrol needs at much higher international prices before it is handed out domestically at subsidised prices.

Of course, all this has a political dimension, with some analysts arguing that Iran is secretly hoping the US will impose petrol sanctions so it can blame Washington for its need to cut subsidies. Better use of energy, would also lessen Iran’s “need” for nuclear power as an energy source.

Subsidies also have an environmental dimension, with Iran suffering horrid local polution. Looked at through a wider lense, cutting subsidies will also cut carbon emissions.

Here is what Fatih Birol, the IEA’s chief economist told Energy Source recently:

At the world level, eliminating all the fossil energy subsidies in the 20 largest non-OECD countries that we looked, including China, India, Indonesia, Pakistan, Thailand, Malaysia, Chinese Taipei and Vietnam, would drive down global carbon-dioxide emissions by 13% by 2050.

Energy Source is no longer updated but it remains open as an archive.

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