Iran Paradox: Why World's 2nd-Biggest Oil Reserve Imports Gasoline

At 136 billion barrels, Iran has the second-biggest proven oil reserve in the world after Saudi Arabia's 260 billion barrels (and not including Canada's estimated 176 billion barrels, most of which are soaked up in Alberta's sands). At more than 4 million barrels of oil per day, Iran is the world's fourth-biggest oil producer. So if Iran consumes just 1.5 million barrels of oil per day, it should have plenty of oil for domestic use and plenty left over for exports.

Yet Iran imports about 40 percent of its gasoline. Last year it paid $5 billion for those imports. Earlier this year Iran's parliament approved a $3.2 billion gas-imports bill, which likely won't be enough for the entire year. The Iranian government has imposed gas rationing in the past. The government argues that it cannot meet the country's future energy demands without developing nuclear energy. What's Iran's problem?

One word: subsidies.

In 2003, the International Energy Agency estimated, Iran subsidized oil product sales to the tune of $11 billion. Energy subsidies there "were equal to 10% of GDP--by far the highest share in the world." With the increase in oil prices, the cost of those subsidies has risen exponentially.

Subsidies aren't just costly to the government. They encourage gas- and energy guzzling and discourage conservation. Iranians burning 17 million gallons per day, a consumption rate of 1.8 gallons per week per person. That shouldn't be a problem; Americans burn more than five times that much -- 9 gallons per person per week (the nation consumes 388.6 million gallons per day). But Iranian refineries are old. They can only produce a little over 10 million gallons of gas per day, leaving a deficit of 7 million gallons that must be filled in with imports.