Iran Largest Fuel Subsidizer for Third Consecutive Year

EghtesadOnline: Iran was the largest fossil fuel subsidizer for the third year in a row in 2019, according to the International Energy Agency.

News ID: ۷۵۰۲۸۳

21 June 2020

Having spent $86.09 billion on fossil energy consumption subsidies in 2019, Iran ranked first globally, leaving behind China with $30.48 billion and Saudi Arabia with $28.72 billion.

The volume of Iranian fuel subsidies extended to its citizens in 2019, which increased 10.9% year-on-year, equals 18.8% of Iran’s GDP.

Iran’s average subsidization rate of fossil fuels (as a proportion of the full cost of supply) was 79%. The country paid $1,038 as fossil fuel subsidies per person in 2019.

In 2019, Iran’s subsidies for natural gas consumption were at $16.32 billion, fossil-fueled electricity at $51.74 billion and oil at $18.03 billion. Transport oil subsidies stood at $13.08 billion.

Iran spent $77.62 billion on fossil fuel consumption in 2018, including $26.52 billion on natural gas, $19.33 billion on electricity and $31.76 billion on oil. Transport oil subsidies stood at $23.96 billion.

In 2017, the country spent $57.76 billion on fossil fuel consumption, including $20.04 billion on natural gas, $17.08 billion on electricity and $20.63 billion on oil. Transport oil subsidies stood at $14.82 billion.

After two years, 2019 saw a decline in fossil fuel consumption subsidies of $120 billion, related in large part to lower average fuel prices over the course of the year.

Almost all countries had lower estimated subsidies year-on-year, the only exceptions being Iran (which remained the single largest provider of these subsidies, despite a hike of at least 50% in gasoline prices in November), Bahrain and Sri Lanka.

The weighted-average subsidy rate was some 15%--meaning that consumers receiving these subsidies paid on average around 85% of the competitive market reference prices for the energy products.

Among the fuels, subsidies to oil products remained the largest single component of the total ($150 billion out of the total $320 billion). Electricity is the next-largest element of the overall subsidy estimate ($115 billion in 2019), followed by natural gas ($50 billion) and coal ($2.5 billion).

IEA has been measuring fossil-fuel subsidies in a systematic way for more than a decade. The analysis performed by the World Energy Outlook team highlights the scale of these subsidies and the beneficial impact of fossil-fuel subsidy removal for energy markets, climate change and government budgets.

It estimates subsidies to fossil fuels that are consumed directly by end-users or consumed as inputs to electricity generation. The price-gap approach, the most commonly applied methodology for quantifying consumption subsidies, is used for this analysis.

The data required for the price-gap calculations are extensive. End-user price and consumption data are drawn from IEA data and, where necessary, from government sources and other reports.

The estimate is sensitive to reference prices, which are calculated for fuels on the basis of international prices. Electricity reference prices are derived from annual average-cost pricing.

For economies like Iran that exports a given fossil-energy product but charges less for it in the domestic market, subsidies are implicit; they have no direct budgetary impact so as long as the price covers the cost of production.

The subsidy, in this case, is the opportunity cost of pricing domestic energy below international market levels, i.e. the rent that could be recovered if consumers paid world prices, adjusting for differences in variables such as transportation costs.

For net importers, subsidies measured via the price-gap approach may be explicit, representing budget expenditures arising from the domestic sale of imported energy at subsidized prices, or may sometimes be implicit. Many economies, including Indonesia, rely extensively on domestically produced fuels, but supplement domestic supply by importing the remainder. In such cases, subsidy estimates represent a combination of opportunity costs and direct expenditures.