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Estimating the Value of Iran’s Subsidies

Estimates of Iran’s subsidies vary widely.  The figure that I see most often quoted is $100 billion per year, which is a huge sum considering the fact that Iran’s GDP is less than $400 billion.  I have used a figure of $50 billion in a previous post, which maybe an underestimate.  My back-of-the-envelope calculations below produce a figure in between — $70 billion.

You may wonder why the government does not publish the actual figure.  The answer is that the government does not know it either, because it does not actually pay for most of the subsidies.  It spends money on agricultural subsidies, medicine, and gasoline imports, but most of the energy subsidies are the opportunity cost of the energy used domestically, at well below international prices, and therefore implicit.

Let us distinguish between three types of subsidies, those for oil products, natural gas, and non-energy.  About 1.5 million barrels per day (mdb) of oil products — mainly gasoline, diesel, and kerosene — are sold at cost, including transportation and refining but not the opportunity cost of forgone exports.  The annual value of these products fluctuates with their prices in the international market.  So, for example, subsidies were high when oil sold at $140 per barrel in August 2008, but fell sharply when oil fell to $40 later that year.  The $100 billion figure is probably stuck from the peak price and did not get adjusted down afterwards.

At about $60 per barrel, the 1.5 mbd of oil sold domestically is worth about $33 billion per year.  Non-energy subsidies amount to less than $10 billion, so to get to the $100 figure we must add $53 billion worth of natural gas subsidy.  I believe this is a sizeable overestimate.

Unlike oil products, natural gas is not internationally traded, so it is not easy to estimate its opportunity cost.  Iran consumed about 2.5 millions of oil equivalent barrels per day (about 14 billion cubic feet) of its natural gas domestically — again, at cost — and exported about 0.5 mbd (oil equivalent) to Turkey.  Export prices are negotiated in individual contracts and fetch variable amounts depending on the competition in the local market.  At present, at most Iran can hope to get about $30 per oil equivalent barrel of its natural gas in the Persian Gulf market, where the likely buyers are.  If we take this as an estimate of the opportunity cost of natural gas at home, the subsidy comes to $27 billion per year, which is much less than the $53 billion people assume.  Even my number is an upper bound because right now Iran does not have the contracts or the pipelines to export natural gas at this price, and prices in the US market are well below $30.

So, the upper bound on the estimate for the total subsidy is $70 billion, not $100 billion.  The latter assumes a price for Iran’s natural gas of over $60 per oil equivalent barrel, which no one is offering, so I do not see any reason why domestic consumers should be billed at that rate.  Still, $70 billion is a huge sum, about 17 percent of the GDP.

Djavad Salehi-Isfahani is a Dubai Initiative research fellow at the Belfer Center for Science and International Affairs at Harvard University.  This article was first published in his blog Tyranny of Numbers on 23 March 2010; it is reproduced here for non-profit educational purposes.  See, also, Djavad Salehi-Isfahani, “Iran: Reform of Energy Subsidies”; Djavad Salehi-Isfahani, “Off Target in Subsidy Reform.”; Djavad Salehi-Isfahani, “Will Iran’s Poor Lose from Subsidy Reform?”; and Humberto Márquez, “The Cost of the World’s Cheapest Gasoline” (IPS, 29 December 2008).

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