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The Fate of Petrodollars
We must be careful to head off inflation because when oil
revenues increase, so does the price of goods and services.
In the following
interview, Tahmasb Mazaheri, former minister of economic affairs and finance
and the current first deputy of the said ministry talks about his bitter past
experiences as well as lessons he has learned through those experiences. He
also talks about increased oil revenues and its positive and negative effects
on domestic economy.
Many people are now thinking about Iran’s oil revenues.
What is your opinion?
Before answering
your question, I want to mention another issue. In my opinion, a more
important point that we should think about is similarity between the current
economic situation of Iran and the situation in 1973-78.
You mean the issue of high oil revenues?
Yes. The same phenomenon which occurred
in 1973 is now being repeated, though current figures are different from those
years. In 1973, oil price jumped from about $2.5 per barrel to $12 per barrel.
It was not a sudden spurt of prices which would go back to normal after a
while. Rather it was a trend. It means that oil prices increased from $2.5 per
barrel to $12 per barrel and remained at that level over the next years and
oil prices never returned to their previous level. This phenomenon greatly
increased Iran’s oil revenues and since officials were not ready to manage it
and planners were not ready for it, it was practically wasted. In other words,
the government at that time failed both in technical and managerial terms to
use those revenues to good effect.
Under the monarchial rule, everybody was
trying to benefit from that bonus and this was a sign that the monarchial
government was not healthy. Also, the country lacked economic stamina to turn
those revenues into economic added value.
What happened to oil revenues during 1973-78?
Those revenues affected all economic
activities from industry to services and imports. In addition, a lot of those
revenues were wasted in the form of paying hefty loans to such countries as
England, France and Israel.
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If total imports and exports now stand at about $80
billion, we must double that figure to about $160 billion if we aim at
realizing the projected 8% economic growth rate. |
The monarchial government also purchased
stocks of European companies, a salient instance of which was stocks of
Germany’s Krupp Steel Company. Iran had purchased 25% of Krupp’s stocks worth
$200 million and also contributed $700 million to the nearly bankrupt company.
Therefore, purchasing stocks and paying loan to Krupp industries cost the
country about one billion dollars. This is an example of economic corruption
in the system, which even prompted royal inspectorate to see into the case.
The current hike in oil prices and its
continuation is affecting Iran’s economy. Prices have increased from about
16-20 dollars per barrel to 40-50 dollars per barrel and they keep
fluctuating. But I think 40 dollars is a reasonable price and everybody seems
to be satisfied with that.
So you believe that 40 dollars per barrel is a suitable
price for consumer countries?
Yes. Oil consumers have indicated their
satisfaction with 40 dollars per barrel. Once, the Organization of Petroleum
Exporting Countries had set a price range equal to $25 per barrel plus and
minus three dollars, that is, maximum and minimum oil prices stood at $22 and
$28 per barrel. When prices increased a little, consumer countries showed
violent reactions and asked OPEC member countries to pump more oil and keep
prices at $25 per barrel. Under current circumstances, everybody is satisfied
with oil prices remaining at $40 per barrel. When actual oil price is $55 per
barrel, consumers will consider $40 per barrel as a suitable price.
A major question is why this phenomenon
has taken place. In response to that question, we can point to economic growth
and projections about increased oil demand up to 150 million barrels in coming
years. Of course, increased price of fossil fuels is a positive point for
consumer countries, because high oil prices will encourage them to develop
other energy sources including nuclear energy.
From the viewpoint of Iranian economy,
we can say that oil revenues of Iran have surged from about $16 billion with
2-3 billion dollars in fluctuations, to about $40 billion now. The question is
whether surge in revenues is a temporary phenomenon or is it permanent?
Answering this question is very important for our economy. We must be able to
analyze oil economy in view of global conditions, world economy and role of
crude oil in world economy.
If we reached the conclusion that $40 billion is a
permanent revenues and Iran’s oil earning has increased from $16 billion to
$40 billion, the question is what must we do with that money?
We must be
careful to head off inflation because when oil revenues increase, so does the
price of goods and services. Just in the same way that a 3% increase in
inflation before 1973 reached 10-12 percent in 1976-77, there are potential
grounds for repetition of the same phenomenon at current juncture.
An important thing that may happen is increase in imports.
The question is how will imports be increased and what goods will be imported?
|
An 8%
economic growth rate will increase domestic production of goods and
services which cannot be consumed inside the country and this may lead
to high inflation rates |
Part of the said
$40 billion revenue will go into Iran’s foreign deposits and another part will
be spent on imports. We imported about 35-36 billion dollars worth of goods in
2004 and another part of petrodollars was deposited in Oil Stabilization Fund.
However, the issue is that if we have aimed at an 8% economic growth rate
during the Fourth Economic Development Plan, it needs prerequisites that
should be provided in the Iranian economy. One of the main prerequisites of an
8% economic growth rate is increased imports and exports. This means that if
total imports and exports now stand at about $80 billion, we must double that
figure to about $160 billion if we aim at realizing the projected 8% economic
growth rate.
Assuming that we will realize the targeted 8% economic
growth rate within the next five years, the 8% growth would mean that goods
and services produced in the country will greatly increase by the end of the
Fourth Economic Development Plan. The question is who is to buy those goods
and services?
This has nothing to do with our main
discussion, but I like to explain about it because I think that this issue
will be among the main economic riddles of our country over the upcoming
years. Thus far, we have attended to two economic problems facing Iran. The
first problem was oil and we said that when oil prices rise or fall, in both
cases, they will impact our economy. During recent years, part of the oil
revenues have been actually wasted, because part of our oil revenues were
spent on inaugurating projects that have not gone beyond paperwork. There are
also plans that have been implemented through petrodollars, but if, for
example, $50 million have been spent on them, the real cost has been $30
million. This happened because we had no plans for surplus oil revenues and
parts of them were actually wasted.
The second issue we are talking about is
the 8% economic growth rate. An 8% economic growth rate will increase domestic
production of goods and services which cannot be consumed inside the country
and this may lead to high inflation rates. In that case, high inflation will
work to slacken economic growth rate.
We have an economic sector known as exports for which we
can make plans to attain an 8% economic growth rate. Don’t you think that
attention to foreign outlets is a must?
Yes. This is
what actually happened in such countries as South Korea, Malaysia, and China.
That is, Malaysia is currently exporting a lot of what it produces. The same
is true about South Korea, Japan, and Germany. What do you think will happen
if one day Japan was not capable of exporting its products? Can Japan solely
rely on domestic markets? The answer is certainly negative. If Japan did not
export televisions or cellphones, what could they do about tens of millions of
such equipment which is produced every year? The only country which has been
able to keep up an 8% economic growth rate is China with the high population
being the main reason. Of course, the Chinese government requires all foreign
investors to export, for example, 30% of what they produce. During Southeast
Asian economic crisis, the government reduced that figure to about 10-15
percent and weathered the crisis by relying on its huge domestic market. But
even despite that domestic market, China is still relying on exports. If China
is deprived of exports, it will be at a great loss. Of course, it will not be
hit as badly as Japan due to huge domestic market. The same is true about us.
If an 8% economic growth is realized, production of goods and services in the
country will greatly increase without having a matching domestic consumer
market. Just imaging what happened to machine-made carpets when production
outsized the demand. The same is happening to macaroni. Just imagine this
happens to the whole economy. If we are to realize an 8% economic growth rate,
a lot of products should be exported and we must also increase import of goods
and services to the country.
What are prospects for oil price?
I believe now that supply stands at 80
million barrels against a higher demand equal to 120 million barrels crude oil
per day, oil prices are likely to hit $150 per barrel. If by oil price, you
mean actual cost of extracting oil, that it is $50 per barrel on the land and
in the sea. The matching figures for English Channel and Canada stand at $12
and 20-22 dollars per barrel, respectively.
My point is that when analyzing current
situation, first we must discuss future changes in oil prices to see whether
oil price will stay above $40 or not. Then we must decide about surplus
revenues. We need correct management for resources to prevent what happened in
1973-78 from happening again. At that time, we only witnessed wastage of
resources, increased inflation rate and more consumption in the society. |
