Iran's Oil Production Is Drying Up

02/20/2007
Filed by Michael Roston

A report in today's Wall Street Journal paints a picture of an Iran in the early stages of an energy crisis. Although long considered an energy giant, the Persian Gulf country is facing the prospect of an oil output crash within a decade, and it may start rationing gasoline next month.

Bill Spindle writes in the Journal this morning that Iran's oil production is stagnating. Demand in the country is high because the government makes the price of gasoline very cheap. At the same time, "a combination of Western sanctions and Iranian policies has discouraged foreign investment in oil fields," resulting in a lull in production growth. The problem is so severe that Iran's government "shelled out at least $7 billion on gasoline imports alone so far this fiscal year."

In response, Iran is hoping to expand its production abilities. But the US government and others see political implications from the current state of affairs in the Iranian energy sector. "Iran's energy woes could make it more vulnerable to international
economic sanctions," Spindle writes. "Even many Iranian officials concede that
the longstanding ban the U.S. has placed on American oil companies working in
Iran has hampered the country's ability to develop its oil fields adequately."

The full article can be accessed by Wall Street Journal subscribers at this link. An excerpt is provided below.

At the same time, a combination of Western sanctions and Iranian policies has discouraged foreign investment in oil fields, causing production to stagnate. The result: Iran's oil exports could dry up in as little as a decade, according to some who have studied the situation. That's a looming disaster for Iran, which derives about 85% of its export income from the sale of oil. "The industry is in a crisis," says Mehdi Varzi, a
former Iranian diplomat and national oil company official who heads a London-based consulting company, Varzi Energy.

The impact would be felt far beyond Iran. The country produced 3.8 million barrels of oil a day in 2006, almost 5% of the world's total supply, according to the Organization of Petroleum Exporting Countries. It exported an average of about 2.5 million barrels of that each day. Should those sales decline, Iran's largest customers, Japan and China, would scramble for other supplies, pushing up prices for everyone.

Avoiding an export squeeze is one reason Iran argues it needs to consider nuclear energy. But that ambition has contributed to a diplomatic impasse with the West. Bush administration officials describe Iran's nuclear program as little more than a ruse to conceal what they say is a hidden effort to build nuclear weapons. Iranian officials deny that, arguing that nuclear plants could handle some of the soaring domestic energy demand, leaving more oil and gas to export and avoiding difficult domestic choices.