Emerging Picture of a Regime in Disarray

Internal issues in Iran have shifted government and public attention away from foreign policy and nuclear issues to divisive internal power politics and such issues as the deteriorating economy, the housing crisis, gas rationing, press crackdown, health insurance disorganization, stock exchange predicament and the like. This summer is indeed proving to be a hot one for Iran; not for the often-talked-about foreign military attacks on the country, but because of an emerging picture of a regime in disarray.

For the regime, the death of Ayatollah Meshkini could not be more untimely. The internal power struggle that was to come to a head during the elections for Majlis next March now has to play itself in less than a month in a battle between two influential ayatollahs, Hashemi Rafsanjani and Mesbah Yazdi. One of them will replace the deceased speaker of the Assembly of Expert during the assembly’s meeting scheduled for 4-6 September.

Ahmadinejad’s government and the fundamentalists are pushing Mesbah’s candidacy. Their plan is clear: they have the presidency; they have the current Majlis; they are preparing the groundwork for Guardian Council’s disqualification of prominent moderate candidates for the next Majlis; and now they want Meshkini’s seat to exert maximum pressure on the middle-of-the-road clerics to join their bandwagon. The fundamentalists are going for an all-out power grab.

The continued detention of the Iranian-Americans is a move by the government to broadcast further “confessions” linking high-ranking former officials in Khatami and Rafsanjani administrations and conservatives such as Mohsen Rezaie, who may have attended many international conferences in the past, to foreign organizations including intelligence services; and hence disqualifying them from running for the 8th Majlis or in the 2009 presidential elections.

Hashemi, Karroubi, Khatami and Rezaie need to make a stand now or to loose their influence and possibly their reputation.

The economic woes are adding to the political instability in the country. Ahmadinejad not only did not bring oil revenues to people’s dinner tables as promised, but during his two-year leadership the cost of housing kept skyrocketing, the gasoline was rationed, inflation rate passed 20% mark, and unemployment, especially among the youths, reached alarming levels.

On international scene, Ahmahinejad's policies helped isolate Iran to a dangerous level. Major financial institutions are cutting ties with Iran and the country is facing severe sanctions through the UN and outside of it.

The rise in oil prices to historical highs has provided the government the cash needed to sustain its programs. Behind the veneer created by this cash flow, however, are the bitter realties of double digit inflation and unemployment as well as the increasing isolation of the country. The isolation, directly helped by Ahmadinejad’s diatribes and policies, is preventing major investments in the country and in the very oil industry which has been the government’s cash cow, presenting a real possibility that Iran would run out of oil exports in less than a decade.

A country in crisis needs a government able to bring together its people. Instead, the past two years of Ahmadinejad’s administration have become a period of government’s all-out war on free press and the journalists, on students, on women, on workers and the unions, on youths, and on Iranians abroad. Ahmadinejad's two-year reign has been a disaster for Iran.

Housing Crisis in Iran

Buying or renting a home in Iran has become unaffordable. The 57 economists in their open letter to Ahmadinejad last month had estimated the one-year increase in housing prices at 50%. Iran’s leading business paper, Donya-ye Eghtesad, has estimated that the rate of increase in rent in Tehran has exceeded 100% in the one-year period between July 2006-July 2007 (26 July 2007). Last year, the paper had reported a similar 100% increase in the cost of housing in Tehran between July 2005-July 2006 (31 July 2006).

Doubling of rent in Tehran, coupled with large increases in other cities, is creating an unbearable situation for the Iranian people. Donya-ye Eghtesad in its 26 July issue quoted a working couple faced with this dilemma: “My wife and I hardly earn 500,000 tumans a month, out of which we have to pay 400,000 tumans as rent. How can we live on 100,000 tumans a month?"

The prices for construction material are also skyrocketing. Aftab Yazd reports that the price of bricks rose by 150% within the past 6 months (15 July 2007).

The housing crisis is serious enough to add to political instability in the country. Ahmadinejad’s administration will be regarded by people as directly responsible for not only dropping its campaign promise of bringing oil revenues to their dinner tables, but leading the country into a period of skyrocketing housing prices.

Iran Oil Executive Confirms Drop in Production

The managing director of Pars Oil and Gas Corp. and the former oil minister Akbar Torkan said, “At the moment, on average, we produce four million bpd of crude. But without new investment, five percent of this production capacity will be gone every year,” ISNA reported (8 July).

In the 1 July posting in this blog, “The Coming Oil Crisis”, we calculated the diminishing rate of production to be at 8% a year. The decrease plus the annual 2% increase in domestic demand for oil would lower Iran’s oil exports by 10% annually. Out of 4 million bpd of oil production, some 2.4 million bpd is currently exported. At this rate, Iran will run out of oil export by 2014.

The Coming Iranian Oil Crisis

The current gasoline crisis in Iran is only a preview of what’s ahead for the country’s oil industry. The country’s economic health depends on oil production and oil exports, yet the production at oil fields are depleting at an alarming rate. The effect of production depletion on oil exports in the next 5-7 years will be phenomenal.

· The production at a typical oil field is diminished by 8% annually.

· Without any new fields coming on stream, the annual oil production in the country is diminished by 8% due to the normal depletion of the oil fields.

· The local demand for oil also is growing at a rate that in effect takes away another 2% of the annual production.

· With no new oil fields, and no increase in the productivity of the existing fields, the depletion in production and the increase in local consumption will combine to translate into a 10% reduction in the volume of oil exports annually.

· With Iran producing some 4 million barrel a day (b/d), this reduction translates to a loss of 400,000 b/d.

· If the increase in the price of oil Iran can charge its customers does not keep pace with the 10% decline in the volume of oil production, then the revenues generated by oil exports will also decline.

Before we get to oil pricing, let’s examine what it takes to make additional production capacity on line to partly compensate for the 10% decline in the current production.

· The typical cost of bringing a new oil field into full production in the Middle East, averaging for both onshore and offshore varieties, is about $7,500 per barrel a day, with the cost in Iran estimated to be around $7,700 per b/d.

· At $7,500 per b/d cost, the cost of replacing the 400,000 b/d depleted each year with new production capacity will be more than $3 billion annually.

· In the past decade, the typical contracts signed with foreign companies for investment in new fields has called for 60% foreign share in each project.

· The amount of foreign investment needed to maintain the production at current levels will be close to $2 billion annually.

· Considering the fact that its takes at least 5 years (typically longer in Iran) for a drilling investment to start production, Iran would need an immediate $10 billion in foreign investment, now and not in future, to maintain the current production levels.

The reality on the ground is that foreign oil companies are pulling out of Iran. The Japanese pulled out of the critical Azadegan fields, and Toatl and Shell also pulling out gas projects. With the current political climates created as the result of Iran’s standoff with the West over its nuclear program, no significant foreign investment in oil and gas industry is expected. Iran analysts increasingly estimate zero foreign investments in foreseeable future.

Without the 60% share of foreign investment, Iran would need to raise locally $15 billion for new oil fields. Added to this, is the urgent need for additional refineries to meet the current gasoline demand, which the analyst estimate at another $15 billion.

$30 billion in urgent investment to keep the current oil production and to meet the current gasoline demands with no foreign capital and with no foreign know-how can not and will not happen.

In the past two years, Iran has missed it OPEC oil production quota by some 250,000 b/d. If we calculate the average export price of Iranian crude at $54/b, the country has forfeited some $5 billion a year for not being able to meet its OPEC quota. For a government that depends on oil export revenues, forfeiting $5 billion a year in hard currency can only show the depth of the crisis on hand.

Iran produces 4 million b/d of oil. Its local consumption needs are 1.6 million b/d. The balance, 2.4 million b/d, goes for export. Without investments in new production capacity, the country will loose 400,000 b/d in production, and with local demand not decreasing, it will mean 400,000 b/d decreases in exports. At the current rate and in the current political atmosphere, Iran will run out of oil export by 2014. The country is facing an oil crisis of unbearable proportions.