The State of the Iranian Oil Industry and Its Role in Irans Economy - Case Study Example

Irans Oil Industry: A Sustainability Report EXECUTIVE SUMMARY Irans economic reliance on the oil industry has been stronger than ever as demonstratedby the steady trend in domestic demand and the government’s effort to counter the adverse impact of its economic isolation. An increase in its energy output is seen as the only way to solve the issues it currently faces. This focus has led to several sustainability challenges that require immediate attention if the country is to achieve a viable economy in the long-term. This report details the state of the Iranian oil industry and its role in the Iran’s economy. The information is used to underscore the environmental vulnerabilities that emerge as outcomes of extreme oil production activity. Three sustainability challenges are identified: 1) air pollution, 2) damage to water resources; and, 3) potential environmental impact of conflict. Based on these three factors, a sustainability strategy was developed, one geared towards addressing pollution, the achievement of high efficiency in the oil industry, the engagement of the Iranian public for the purpose of success in policy implementations. The strategy is recommended as part of a strong energy policy framework that would allow Iran to take advantage of its oil resources whilst reducing the environment impact and ensuring economic competitiveness in the long term. Keywords: Iran, oil industry, sustainability, environment, energy policy OVERVIEW Iran belongs to the top five oil producing countries in the world. The International Energy Agency reported that in 2013, the country produced 2.5 million barrels per day and about 1.2 million barrels were exported (World Bank, 2014, pp. 69). For this reason, the oil industry remains a backbone of the Iranian economy. It generates revenues that represent at least 18.7 percent of the countrys gross domestic product and claim 85 percent of the countrys total export and foreign currency earnings (Curtis & Hooglund, 2008, pp.160). Reports indicate that high oil prices in the past decades enabled Iran to accumulate almost $60 billion in foreign exchange reserves (USA IBP, 2009, p. 275). The focus in oil production, however, has led or has aggravated three important sustainability challenges: air pollution; damage to water resources; and the environmental damage stemming from potential conflict. Air Pollution Air pollution remains the leading environmental problem in the country. It is caused by vehicle emissions, refinery operations and industrial effluents. Particularly, combustion from vehicular traffic dominates pollutants. In Tehran, for example, they contribute to around 80 percent of air pollution (Jacobson, 2012, pp.196). Cheap gasoline is the main reason for this. The government subsidy has led to a large vehicle fleet of about 12 million cars and 7 million motorcycles, most of which are at least 20 years old (Jacobson, pp. 196). This is aggravated by a drastic increase in the Iranian population in the past decade, leading to a staggering 50% increase in primary energy consumption (EIA, 2014). Reports indicate that the combination of cheap gasoline and the population explosion led to a disturbing incidence of wasteful energy use (Cordesman, Golde & Coughlin-Schulte, 2014, pp. 109). The impact of air pollution could be demonstrated in severe smog events in Iranian cities, which led to several incidences of school and office suspensions in recent years as well as the increase in respiratory ailments for people living in cities like Tehran (Jacobson, pp. 196). Damage to Water Resources and Desertification Like most Gulf countries, Iran’s most pressing problem is access to water. The country’s land surface spans 165 million in area but half of it cannot be cultivated for lack of water (US IBP, 2009, p. 61). In the past, Persia addressed this problem by tapping underground water through water channels called qanats (Clawson & Rubin, 2005, pp. 74). But the exploitation of oil reserve and rapid urbanisation are taking their toll on Iran’s underground water system. Surface water such as rivers and lakes are also drying out. The river Zayandeh Roud is a case in point. For a thousand years it has flowed past the city of Isfahan but today it is already parched, affecting the livelihood of about 2 million people (Bozorgmehr, 2014). The same can be said about the history of desertification and deforestation in Iran. Studies show a correlation between oil extraction and these environmental problems in the past 50 years (Amiraslani & Dragovich, 2011). A scientific study by Sepehr, Hassanli and Ekhtesasi (2007) found that the desertification in Iran could no longer addressed by the government alone, requiring international aid because of the sheer expanse of land it covered. An assessment indicates that while Iran could use its immense wealth from oil revenues to address some of the environmental problems at the rate of current environmental damage, it could not prevent their economic impact such as the increase in water costs (Chapman, 2002, pp. 178). These issues are expected to disadvantage the country once oil has been depleted and no longer a source of revenue. Figure 1: The Zayandeh Roud River (Bozorgmehr, 2014) Catastrophes and Conflict Iran’s relationship with the West as well as other Gulf states such as Israel and Iraq, including the threat of non-state actors such as the Islamic State of Iraq and Syria (ISIS) entails a potential conflict that could precipitate an environmental crisis. The Gulf War serves as an example. In the 1991, retreating Iraqi forces spilled 8 billion barrels of oil in the Arabian Gulf and destroyed 616 Kuwaiti oil wells (Ham, 2004, pp.43). RECOMMENDATION: THE CASE FOR A SUSTAINABILITY STRATEGY The overview of economic problems cited above underscore an imperative for a sustainability policy. This is supported by the following economic arguments in the achievement of a viable Iranian economy: Unstable Oil Price: Revenues from oil are highly volatile. It is affected by the value of oil in the world market. At the existing OPEC quota level, Iran is poised to gain or lose at least $1 billion with a mere one dollar change in the global price crude price (Curtis & Hooglund, pp.169). Sanctions: Sanctions has prevented the country from exploiting its oil resources, leading to a decline in both oil and natural gas production. For instance, the joint EU and US sanction imposed in 2011 severely limited Irans ability to sell oil, drastically reducing its oil export with a 1 million oil barrel drop in 2012 (EIA 2014). Figure 2: Irans oil production and consumption, 2011-2014 (EIA, 2014) Supply: Irans oil reserves, which are estimated to be about 136 billion barrels, are expected to last for another 98 years at the current rate of production (USA IBP, 2005, pp.275). Pollution remains as Iran’s most critical environmental problem. The policy, hence, requires critical elements such as the regulation of energy consumption and emissions; the achievement of energy efficiency; and the engagement and education of the Iranian public. Starting in the year 2000, Iran has been taking steps to reduce air pollution in its cities by introducing laws such as the phasing out of older vehicles and the construction of several infrastructures that would reduce vehicle use (Rajendra, Kaplan & Rajendra, 2003, pp.43). In the late 2010, Iran also implemented its ambitious subsidy reform, removing heavy subsidies on oil products, which drastically reduced excessive energy use and waste (Rieffer-Flanagan, 2013, pp. 187). These measures are steps in the right direction but they are not sufficient. The subsidy reform, for example, is viewed to be a short-term solution as it is now threatening Iran with high inflation. More meaningful policies that directly address the role of the oil industry in environmental degradation are required such as restrictions to emission output, further development to the country’s natural gas reserve and other alternative energy sources, those that have far less environmental footprint than crude oil. The sustainability strategy should also aim for an increase in efficiency. New technologies and expertise would augment the capability of the oil industry to extract and manufacture oil products with less environmental damage. For example, there is the case optimised technology that allows the minimal use of water and land resources (DESTech, 2014, pp. 458). The United Nations has also outlined best practices and technologies that reduce environmental impact in oil extraction, which include the use of various methods of solvent refining and recycling designed to increase the limited amount of oil recovery in the conventional methods (UN, 2013, pp.38). Another dimension to the issue of efficiency is the nationalisation of Iran’s oil industry. State-controlled production has been proven to be inefficient with its tendency to have immense bureaucratic makeup, high incidence of corruption and inefficiencies entailed in the use of outdated technology and management techniques (US Congress, 2007). Education is also paramount. Information about the role of the public must be available to articulate measures; to explain and engage the public about its role in the incidence of pollution, its consequences and mitigation. The sustainability strategy needs to focus on a change in public perspective in order for current and future green policies to be embraced. CONCLUDING REMARKS Sustainability policies currently form part of the national strategies of many oil-producing countries in the Middle East. The degree of interest and adoption rest on the fact that the outcome does not only help mitigate damage to the environment. Rather, it has strong economic benefits such as in the area of the diversification of industries, the attraction of foreign investors and the achievement of better living and working spaces for quality and satisfied populace. Iran and its oil industry need such sustainability strategy to help solve its most pressing problems both on domestic and international levels. 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Air Pollution and Global Warming: History, Science, and Solutions. Cambridge: Cambridge University Press. Rajendra, V., Kaplan, G. and Rajendra, R., 2003. Iran. New York: Marshall Cavendish. Sepehr, A., Hassanli, A.M., Ekhtesasi, M.R. and Jamali, J.B., 2007. Quantitative assessment of desertification in south of Iran using MEDALUS method. Environmental Monitoring and Assessment, 1(59), p. 243-254. United Nations Economic Commission for Europe, 2013. Environment and Energy: Environmental Aspects of Energy Production and Use with Particular Reference to New Technologies a Report of the United Nations Economic Commission for Europe. Oxford: Elsevier. US Energy Information Administration (EIA), 2014. Iran. EIA. [online] Available at: [Accessed 18 November 2014]. US IBP, 2005. Iran: Country Study Guide. Washington DC: International Business Publications. US IBP, 2009. Doing Business and Investing in Iran Guide. Washington DC: International Business Publications. US Congress, 2007. 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