Tyranny of numbers

Estimating the value of Iran’s subsidies

Posted in General by Djavad on March 23, 2010

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 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, 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.

4 Responses

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  1. سروش said, on March 24, 2010 at 9:06 am

    Two general comments:
    1. The question is why government stopped to calculate this index while for a short period (1381-1384) the CBI reported the fuel subsidies.
    2. The article by Dr. Hadi Salehi shows that in addition to oil subsidy the exchange rate subsidy is also remarkable and my guest is that those 100$ which states the total subsidy comes from energy subsidy, exchange rate subsidy as well as interest rate subsidy.

  2. stamboul said, on March 24, 2010 at 5:10 am

    How does imported subsidised gasoline fit into this equation? Presumably it is a direct rather than opportunity cost? What category does it fall into and how much does it cost the govt?

    • Djavad said, on March 24, 2010 at 10:07 am

      I have grouped imported gasoline with domestically refined gasoline because I evaluate both at world market prices. So, the $33 billion is a rough total for all oil products, inlcuding imported gasoline.

      • Djavad said, on March 24, 2010 at 10:14 am

        That is a good question–I do not know why the government stopped calculating the subsidy. I know that making subsidies “transparent” has taken a long time, but in the end it contributed to this reform. Importing gasoline instead of building more refineries helped make the gasoline subsidy transparent.

        About the exchange rate, when you have a floating rate it is difficult to argue that it is being subsidised. I am not sure if Hadi’s paper that you are referring to calculated subsidies for the period after exchange rate unification. When there were multiple rates, it made sense to talk of a subsidy to those who got the cheaper foreign currency. I suppose, given that many people argue that the rial should be cheaper now, you might argue that there is a subsidy to everyone who buys imported goods. But that would be very debatable.

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