## IMF Survey: Iran to Cut Oil Subsidies in Energy Reform

_IMF News, September 28, 2010_

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**Canonical URL:** [IMF Survey: Iran to Cut Oil Subsidies in Energy Reform](https://www.imf.org/en/news/articles/2015/09/28/04/53/soint092810a)

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## Bibliographic details
- Published: September 28, 2010

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### Overview
- The Islamic Republic of Iran has begun eliminating energy subsidies, a reform IMF economists say could transform the economy and influence other energy-producing countries.
- Publication date: September 28, 2010.
- Reform aims: remove distortions, restore efficiency, increase exports of oil and gas, and generate additional government revenue to be redistributed to the population.

### Economic context and rationale
- Iran is the 17th largest economy in the world.
- Foreign debt: less than 7 percent of GDP.
- Underground hydrocarbon resources: $10 trillion in oil alone (at $75 a barrel).
- Natural gas reserves: between $3½-4½ trillion.
- Real GDP growth estimated to have been about 1-2 percent in the year of the interview.
- Inflation trend: declined from close to 30 percent two years earlier to less than 10 percent since September 2009.
- Rationale for reform:
  - Domestic energy prices were far below international prices, leading to rapid domestic demand growth and reduced availability for profitable exports.
  - Wasteful energy use and severe distortions in demand and supply; Iran shifted from being energy-efficient in the 1980s to one of the most wasteful countries.
  - Restoring market pricing is seen as necessary for achieving higher growth potential comparable to dynamic emerging markets.

### Magnitude and distribution of current subsidies
- Extraction cost of oil: roughly $5 to $10 a barrel.
- International oil price peak cited: almost $150 per barrel in 2008.
- Estimated household subsidy (until recently): on average about $4,000 a year for a household of four in various subsidies on oil and natural gas alone.
- Typical individual earnings cited for comparison: many Iranians may earn about $300 a month, or $3,600 a year.
- Distributional effect: subsidy benefits those who use the most energy (wealthier households); poorer households receive very little of the subsidy.

### Policy design and fiscal targets
- The subsidy-elimination proposal was approved by Parliament and signed into law in January (year implied in text).
- The law objective: quasi-elimination of subsidies on par, more or less, with the international f.o.b. price.
- Revenue target specified by the law: $20 billion for the first year.
- The law does not specify the exact price increase for the first year but links the revenue target to the needed price adjustments.

### Redistribution and compensation framework
- Anticipated first-move price increases: potentially of between 4 and 20 times for some energy products.
- Allocation of additional revenues in the first year:
  - 50 percent to households, all in cash—households to be fully compensated and free to spend as they choose.
  - 30 percent to businesses—to help companies invest in energy-efficient technologies and support adjustment, with recognition that heavy industry will take more time to adjust than the service sector.
  - 20 percent to the government—to pay for the government's higher energy bill.

### Expected economic and sectoral impacts
- Domestic demand for energy expected to decline, freeing energy for export and increasing government revenue.
- Energy sector profitability expected to improve, enabling more investment, extraction, and production.
- Positive side effect on the global oil market if Iranians restrain consumption.
- Automotive sector:
  - Iran produces about 1.5 million cars per year for a domestic market of 74 million people.
  - Higher gasoline prices expected to incentivize modernization and greater energy efficiency in domestic car manufacture, improving competitiveness for exports.

### Implementation considerations
- Importance of low inflation as a foundation for large price increases in energy.
- Concerns about operational effectiveness: key is ensuring redistribution plans are operational and effective from day one.
- Businesses have had time to plan for adaptation due to multi-year discussion of the reform; government support is targeted to smooth transition and encourage investment in energy efficiency.

*Source: IMF Survey: Iran to Cut Oil Subsidies in Energy Reform (September 28, 2010).*

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## References

- [https://www.imf.org/en/News/country-focus](https://www.imf.org/en/News/country-focus)
- [PRESS CENTER](http://presscenter.imf.org/)
- [IMF Survey Interview](https://www.imf.org/en/news/search)
- [IMF Country Focus](https://www.imf.org/en/news/country-focus)
- [IMF and Iran](https://www.imf.org/external/country/IRN/index.htm)
- [Iran: IMF staff report](https://www.imf.org/external/pubs/cat/longres.cfm?sk=23730.0)
- [Iran: Selected issues](https://www.imf.org/external/pubs/cat/longres.cfm?sk=23733.0)
- [The costs of cheap energy](https://www.imf.org/external/pubs/ft/fandd/2010/06/guillaume.htm)
- [Oil subsidies: costly and rising](https://www.imf.org/external/pubs/ft/fandd/2010/06/picture.htm)
- [https://www.imf.org/en/home](https://www.imf.org/en/home)

_Source: https://www.imf.org/en/news/articles/2015/09/28/04/53/soint092810a_