No Longer Overproducing
RFE/RL: What are the signs of this potential crisis and decline in oil export?
Stern: Iran has, like all other members of the OPEC cartel, a production quota. Some OPEC members are chronic overproducers -- that is, they cheat -- and some can't ever seem to meet their production targets. Since the end of the Iran/Iraq War, for 90 percent of the time, Iran has been a 'cheater.' That is, they overproduce their OPEC quota by some amount. About two years ago, the amount by which they exceeded that quota began to fall. And then 19 months ago, they went under quota; and they've been under quota and falling basically ever since. So it's a very anomalous situation for Iran. That's an indication that something inside the republic has changed with respect to their oil production.
RFE/RL: You said that this situation is a result of mismanagement of the oil industry. Could you please elaborate?
Stern: There are three basic components to Iran's -- what I call -- its export crisis. And the first is a failure to reinvest in the industry. Oil is like any other heavy industry -- a maintenance of the infrastructure is very important. In oil it's even more important, because every oil well that's ever been drilled declines a little bit from one year to the next. So if you want to keep your production level, let's say, you have to find a little bit of new oil via new well-drilling in order to replace the natural decline of a well.
A gas station in Tehran (ISNA photo)
So Iran has failed to do this, and it's failed for a couple of reasons: It's very hostile to foreign firms working in the country; and secondly, the state oil company in Iran doesn't have control of its own revenues. A second big category of problems are the demand subsidies within Iran. Fuel is very cheap; I think a liter of fuel in Iran is nine U.S. cents ($0.09). So, as a result, demand is exploding. So you could say that Iran is burning the candle at both ends -- it's both producing less and less, and it's consuming more and more.
RFE/RL: You've predicted that as a result of these two trends, Iran will run out of oil for export in just eight years. What if Iran changes its policies?
Stern: Iran could change its policies and reduce its subsidies and begin to reinvest and change that projection that I make, but the trend that they're on looks like [by] 2015 -- that exports could go to zero by that time. Iran is its own worst enemy in this petroleum crisis, and it could change its mind. But it's had 20 years since the [1979 Islamic] revolution to do that and its behavior now is consistent with that over the last 20 years, so I don't anticipate a change in policy.
RFE/RL: Could that mean that Iran is really in need of energy and that it has a genuine and legitimate reason to pursue a nuclear program, as Iranian officials have said many times?
Stern: I would say that within the distorted economic logic that prevails in Iran, there is a legitimate need -- but only because the Russians are basically financing the nuclear reactor for Iran by selling this reactor at a very, very cheap price. If normal economic reasoning applied in Iran, what Iran would do to generate more electric power would be to modernize its gas-turban generation base. Most of Iran's electric power comes from gas generation, a little bit from oil, and a very small bit from hydro[-electric power]. But Iran has the same reinvestment problems in power generation as it does in oil -- that is, the product is subsidized, so the power generation firms can't make money so they're not reinvesting. So here comes Russia willing to sell Iran a nuclear reactor at maybe one-fourth [of] the world price. So with no other, better alternative, that is an appealing alternative to Iran. It doesn't mean, nor do I believe, that Iran does not have an intention to develop nuclear weapons.
Room For Maneuver
RFE/RL: What does this mean for the U.S. and other countries that are putting pressure on Iran over its sensitive nuclear activities?
Stern: If exports decline as I project, and if price fails to rise to compensate for the decline in the quantity that can be exported, then that would -- in my opinion -- be a real political constraint on the regime, whose popularity is really quite dependent on the distribution of these monopoly oil profits that the state oil firm collects. Iran's government relies on oil exports for somewhere between 70 and 80 percent of its revenues, so this a real problem.
RFE/RL: Some Iranian officials have in the past said Tehran could use oil as a weapon in case of increasing international pressure over the country's nuclear program. How do you see that?
Stern: I think that that's laughable. If your government relies on oil export for 80 percent of it revenue, by cutting off oil to the world, basically the regime would be cutting its own throat. Iran exports a little under 2 1/2 million barrels [of oil] a day; the world consumes 85 million barrels. So while the disappearance of that amount of oil would definitely have an impact on price, the world would not stop, it would simply pay a higher price; Iran's government would stop.