The financing model underpinning the US shale oil industry is fundamentally different from that of large companies producing predominantly in conventional oil. Small and medium-size independent producers, which dominate the US shale industry, generally have much higher leverage with high levels of debt and hedging. Since its inception, the industry has been characterised by negative free cash flow as expectations of rising production and cost improvements led to continuous overspending in the sector. Over the last few months, the industry as a whole has seen a notable improvement in financial conditions, though the picture varies markedly by company, and the overall health of the industry remains fragile.
In order to try to assess as precisely as possible the developments of shale industry throughout the decade, we identified four distinct phases that have characterised the shale industry since 2010 up to now.
2010-14: The start-up phase
In the 2010-14 period, technology developments and high and stable oil prices triggered a massive investment wave in the US shale sector. Investment more than quadrupled, leading to an eightfold increase in shale oil production, from 0.44 million barrels per day (mb/d) to over 3.6 mb/d – the fastest growth in oil production in a single country since the development of Saudi Arabia’s super-giant oilfields in the 1960s.
However, the growth came with a huge bill. The sector as a whole generated cumulative negative free cash flow of over USD 200 billion over those five years. Throughout this phase, companies were forced to rely extensively on external sources of financing, predominantly debt and receipts from the sale of non-core assets, in order to finance their operations. In addition to issuing bonds, companies benefited from the reserve base lending structure – a bank-syndicated revolving credit facility secured by the companies’ oil and gas reserves as collateral. This structure was used heavily by small and medium-sized companies with non-investment credit rating that did not have as easy access to the corporate bond market.
2015‑16: The survival phase
The collapse of prices in the second half of 2014 and throughout 2015 and early 2016 had a major impact on the way the shale industry operates. Companies switched to survival mode, focusing on improving efficiency and cutting costs. The number of firms declaring bankruptcy and filling for Chapter 11 protection, a form of bankruptcy involving reorganisation, skyrocketed to almost 100 in 2015-16.
The fall in prices also changed the way the shale industry was financed. Debt finance dried up as banks were unwilling to lend during a period of market turmoil, with bond yield spreads widening to over 1 000 basis points and the credit rating of the majority of companies being downgraded. Asset sales also dropped by 70% in 2015 as owners were unwilling to part with assets at the much lower prices on offer. While the main buyers of the assets were US independent companies, the market turmoil discouraged bank lending, opening up opportunities for financial firms such as private equity firms, which typically have a higher risk profile. Those firms accounted for around 30% of reported asset deals over 2015-16. Available funding from the reserve base lending structure also declined as the value of proved reserves for collateral shrank with lower oil prices. The net result was that companies were obliged to raise equity to finance their operations – a more expensive option.
Despite the slump in revenues throughout this period, the shale industry actually saw an improvement in free cash flow as a result of huge cuts in capital spending and costs. Between 2014 and 2016, investment fell by 70% and costs by around half. Cost reductions helped to offset the impact of less investment, such that shale oil production declined only modestly in 2016.
2017: The consolidation phase
The recovery of oil prices since mid-2016 following the collective decision by the Organization of the Petroleum Exporting Countries (OPEC) and some non-OPEC producers to cut output led to a revival in confidence in the US shale sector. Further advances in technology, huge efficiency gains and cost reductions, and an upward revision of the shale resource base triggered an increase of 60% in investment in 2017. In the meantime, the shale industry proved that its upstream cost structure had been rebased as it was able to offset inflationary pressures coming from overheating of the supply chain, further reducing the overall costs per barrel produced.
Despite the improvements achieved, however, the shale sector continued to slightly over-spend the cash flow generated from its operations, with 2017 cumulative free cash flow remaining overall negative. Asset sales once again became the main source of financing operations, with most transactions occurring between US independent companies. Asset sales involved mainly acreage rather than whole companies, as companies sought to do relatively small deals as a way of making gains in operational efficiency. The confidence in the shale sector, traditionally dominated by private investors and small and medium-sized companies, received a boost from announcements by large US oil companies of their intention to make substantial investments.
2018: Profitability at last?
Current trends suggest that the shale industry as a whole may finally turn a profit in 2018, although downside risks remain. Thanks to a 60% increase in investment in 2017 and, based on company plans, an estimated 20% increase in 2018, production is projected to grow by a record 1.3 mb/d to over 5.7 mb/d this year. Several companies expect positive free cash flow based on an assumed oil price well below the levels seen so far in 2018 and there are clear indications that bond markets and banks are taking a more positive attitude to the sector, following encouraging financial results for the first quarter. On this basis, this we estimate that the shale sector as a whole is on track to achieve, for the first time in its history, positive free cash flow in 2018. This result is all the more impressive given the context of rising investment.
Structural changes also augur well for the sector. Recent consolidation, such as the recent USD 9.5 billion Concho-RSP Permian merger, and the increased participation of the majors and other international companies could bring significant economies of scale and accelerate technology developments, including through digitalization. Larger companies generally have a more robust financial structure and rely less on external sources of financing, so their shale investment will be less vulnerable to future downswings in oil prices and financial conditions.
The potential risks for shale independent from rising interest rates are currently attracting a lot of attention. The impact of rising interest rates on independent oil and gas companies in the US shale industry may also be small. Most companies are highly leveraged, benefiting from the ample availability of low-cost bond finance. However, given the high depletion rate, the time horizon of shale projects is so low that the discount rate has only a minor impact on the net present value of a given project. Rising interest rates often coincide with tighter lending conditions, which may make it harder for companies to service their debts and refinance their operations. But this risk can be managed through asset sales to less-capital-constrained companies, such as the majors, and increased reliance on equity raising through IPOs and private equity.
A lot of attention has been focused on interest expenses – the cost of repaying debt. The development of shale production has been accompanied by constantly rising interest expenses, which has impeded companies from generating profits sustainably. For the first time, the overall amount of interest expenses paid by shale companies declined in 2017. While US shale companies remain far more leveraged (measured by the net debt/equity ratio) than traditional operators, leverage is falling from its peak in 2015 and the average interest rate paid by shale companies – currently around 6% – has been broadly stable in recent years despite rising interest rates generally since the end of 2015, though they still pay more than conventional oil producers. Improving financial conditions mean that shale companies are able to borrow more cheaply than before.
The US shale industry seems to have reached a turning point with the recent significant improvement in its financial sustainability. But major uncertainties and important downside risks to the future of the shale industry remain:
Above-ground constraints: With production rising very rapidly in certain basins, such as the Permian, timely investment in takeaway capacity and pipeline infrastructure will be vital to the further expansion of the industry. At present, several producers in the Permian Basin are forced to discount their crude oil by more than USD 15 per barrel compared with the price on the Gulf Coast due to a lack of pipeline capacity. No significant pipeline capacity expansion is expected before 2019. The importance of infrastructure applies not only to oil but also to associated gas production, wastewater and other products. In the absence of new pipeline capacity, companies might be forced to curb drilling or ship their production using trucks or rail, which are usually much more expensive.
Further productivity gains: The continued ability of the companies to offset inflationary pressures with improved productivity stemming from technology or improved project execution remains very uncertain. In most active basins, especially the Permian, there are clear signs of overheating and bottlenecks in skilled labour, materials and equipment. In addition to the potential for further technological advances, there may be scope for more efficiency gains, for instance by expanding operations in continuous acreages, improved understanding of the resource base and more accurate spacing of wells.
Grabbing the fruits of the “digital revolution”: Companies are putting more effort into developing and adopting innovative digital technologies and big-data analytics in order to reduce costs, by optimising operations, improving reservoir modelling and enhancing processes.
Competition from other sources of oil: The US shale sector has not been alone in reducing its costs and will need to continue to do so to remain competitive in international markets. Most onshore resources, especially in OPEC countries, cost less to produce than shale oil, while the bulk of new deepwater projects are competitive with the cheapest shale basins. Consequently, the US shale industry is required to keep improving.
This analysis was written by IEA Senior Programme Officer Alessandro Blasi and IEA Energy Investment Analyst Yoko Nobuoka, and was adapted from World Energy Investment 2018. Source: IEA
Renewable Energy is a Brewing Geopolitical Catastrophe
According to the International Energy Agency (IEA) “the world will spend $US 162 billion subsidizing renewable energy (mainly solar and wind.” This money could be spent on the over 2 billion people globally without electricity – over 600 million in just Africa – that will be used to prop-up chaotically, intermittent and grossly inefficient renewables. Every nation-state, country, or individual state that uses renewables on a wide-scale basis realizes higher electrical prices and emissions for the simple reason they need constant fossil fuel or nuclear energy backup.
Consider Australia, which has “substantial energy reserves.” Green state governments have legislated keeping their oil, natural gas, and coal in the ground, and this means the Australian Defense Minister, Linda Reynolds has been seeking U.S. help for their dangerously low national fuel supplies. Australia – in a perilous, geopolitical move – is likely sending warships to the Strait of Hormuz to protect the oil-rich Persian Gulf. Australia should have never been in this predicament if it weren’t for overreliance on renewables, and energy battery storage systems that cannot meet Australia’s supply of energy needed causing substantial capacity issues.
Now realize the entire world going down this path except China, Russia, Iran, and North Korea, since the Paris Climate Agreement (PCA) if fully implemented:
“Will cost the world from $US1 trillion to $US2 trillion a year by 2030, neither of these hugely expensive policies will have any measureable impact on temperatures by the end of the century.”
The UN Framework Convention on Climate Change has also debunked the Paris Climate Agreement by estimating: “
Even if every country makes every single carbon cut suggested in the Paris treaty to the fullest extent, CO2 emissions would be cut by only 1 per cent of what would be needed to keep temperature rises under 2C.”
To reiterate the complete-nothingness of energy policy options coming from green-aligned legislators – the much-touted U.S. Green New Deal – from Congresswoman Alexandria Ocasio-Cortez, D-N.Y., and Senator Ed Markey, D-Mass., “would have no meaningful impact on global temperatures.”If the U.S. entirely cut out every ounce of carbon dioxide emissions (CO2), “100 percent it would not make a difference in abating global warming.”
Every green policy being considered and utilized by governments globally – particularly, in the U.S. and European Union (EU) – would:
“Fundamentally change how people produce and consume energy, harvest crops, raise livestock, build homes, drive cars, travel long distance, and manufacture good.”
The entire green movement believes harnessing the sun and wind is the answer when nothing could be farther from the truth. Besides zero-carbon nuclear power plants, there is new technology from net-zero natural gas-fired power plants currently being “demonstrated,” or natural gas-fired power plants are the best option, because there use allowed the U.S. to be the only industrialized nation to meet the Kyoto Protocol standard.
The other low cost, simple option to reduce emissions is planting trees. Instead, the west continues committing a suicidal, economic death spiral that will allow their enemies to pick up the pieces in their race toward authoritarian, governmental control.
If the U.S. cannot ensure the liberal-led order in place since World War II (WWII) over keeping fossil fuels in the ground and nuclear energy on the shelf then who will use realist balancing against China, Russia, Iran, and North Korea? Not Australia – realistically, and militarily, the Australians do not have the blue water navy capabilities, or force projection to deter the Iranians in the Middle East. Only the Americans backed by NATO do at this time.
The premier environmental organization – the United Nations (UN) Intergovernmental Panel on Climate Change said: “if we did absolutely nothing to respond to global warming, the total impact by the 2070s will be the equivalent to a 0.2 per cent to 2 percent loss in average income.” Then a global poll of 10 million people by the UN “found that climate change was the lowest priority of all 16 challenges considered.” Climate change and renewables are interwoven.
Vaclav Smil, author of the premier energy book, Energy and Civilization, endorsed by Bill Gates opined about renewables by saying: “The great hope for a quick and sweeping transition to renewable energy is wishful thinking.” Al Gore’s chief scientific advisor, Jim Hansen also opined the same sentiments:
“Suggesting that renewables will let us phase rapidly off fossil fuels in the United States, China, India or the world as a whole is almost the equivalent of believing in the Easter Bunny and Tooth Fairy.”
Where this is geopolitically concerning comes to India. In coming years they will have a larger population than China, and they need more, not less fossil fuels for prosperity and development. According to the UN 2019 Multidimensional Poverty Index, “India lifted 271 million people out of poverty in a decade,” by building nuclear power plants, coal-fired power plants, and using fossil fuels in way they never have in their history.
If India went the way of Australia, which is currently experiencing electrical blackouts from wind turbine farms, and political instability, then the Kashmir crisis could be enflamed further, and China would move to conquer or crush India in every way possible. Deterrence that comes from fossil fuels and nuclear that fuel militaries and nuclear arsenals will continue keeping the peace that has led to unprecedented global prosperity and poverty reduction. Currently, renewables cannot accomplish those goals.
What geopolitics understands is the reality that China, Russia, Iran, and North Korea are presenting to world peace. Renewables are on the precipice of causing a geopolitical disaster when policymakers believe this will solve world energy problems that actually don’t exist. Renewables need to be weaned off subsides and an all-of-the-above approach is what will eventually allow solar panels and wind turbines to displace fossil fuels. But the problem of what to do with the over 6,000 products that come from a barrel of crude oil will need to be solved – including every part of the solar panel and wind turbine supply chain emanates from crude oil. Or else, the world is walking into a geopolitical disaster of their own making believing renewables will displace fossil fuels or nuclear energy.
Three priorities for energy technology innovation partnerships
Authors: Jean-Baptiste Le Marois and Claire Hilton*
Governments around the world are setting increasingly ambitious climate targets while at the same time pursuing challenging national policy goals such as affordable and sustainable energy for all. In many cases, achieving these goals will require technologies that either do not yet exist, or are not yet ready for market, meaning innovation will be critical. Technology innovation can be a game changer across all sectors, including power generation, industry, buildings and transport.
Yet it is unlikely that any single country will be able to solve all of its energy and climate problems alone. International collaboration can help countries accelerate innovation processes by identifying common priorities and challenges, tackling pressing innovation gaps, sharing best practices to improve performance, reducing costs and reaching broad deployment of clean energy technologies. Given this massive potential, the fundamental question is not if countries should collaborate, but rather who should collaborate and how they can do so efficiently.
As part of the IEA’s efforts to support global energy transitions, we are working to help governments identify relevant collaborative partnership opportunities, engage with international partners and optimise possible synergies among existing initiatives. Our recent Energy Technology Innovation Partnerships report is a key step along this path, providing an overview of the global landscape of multilateral efforts relevant to energy technology innovation, and examining four selected collaborative partnerships. There are three key takeaways that highlight the challenges and potential of these efforts.
Enhancing collaboration among existing multilateral initiatives
International collaboration in the field of energy technology innovation is not new – many countries already participate in numerous multilateral initiatives, some of which have been active for decades, such as The Technology Collaboration Programme by IEA (TCP) which was established in 1974. Today, 38 independent Technology Collaborations operate under the TCP, made up of over 6,000 experts from nearly 300 public and private organisations based in 55 countries, who work together on topics ranging from renewable energy and smart grids to hydrogen and nuclear fusion.
Governments have launched several new partnerships over the last decade, such as the Clean Energy Ministerial (CEM) in 2009 and Mission Innovation (MI) in 2015, which both aim to accelerate international efforts to address climate change. The 27 members of CEM collaborate to promote the deployment of clean energy technologies through over 20 initiatives and campaigns. Similarly, MI counts 25 members who have pledged to double clean energy RD&D spending and co-lead activities under eight key innovation challenges, such as clean energy materials and affordable heating and cooling in buildings. Participation in Technology Collaborations, MI and CEM present a great degree of overlap, as countries tend to join the full suite of collaborative partnerships. In fact, 13 countries and the European Commission participate each in more than 20 Technology Collaborations, CEM and MI: the United States, Japan, Korea, Canada, China, Germany, Australia, France, Sweden, Finland, Italy, Norway and the United Kingdom. This “core” group of decision makers is in a strong position to pursue further synergies across partnerships.
There are also many relevant regional partnerships that are making valuable contributions to energy technology innovation, such as the European Technology and Innovation Platforms (EU-ETIPs), which bring together EU governments and companies to identify research priorities and relevant energy innovation strategies.
Other examples of regional partnerships include mechanisms under the African Union and other African regional partnerships; the Asia-Pacific Economic Cooperation and the Association of Southeast Asian Nations; various partnerships in the Middle East; and the Latin American Energy Organisation and the Organisation of American States. Many other partnerships focus on specific themes of interest, such as the Biofuture Platform, a group of 20 countries seeking to advance sustainable bioenergy and facilitated by the IEA.
As the global landscape of multilateral activities relevant to energy technology innovation becomes increasingly diverse and complex, it can be challenging for policy makers to identify which partnerships to engage with. In fact, despite the central role of innovation in energy transitions and the potential of international collaboration, there is limited information available on the full landscape of multilateral initiatives and how they interact.
Examining a selection of collaborative partnerships reveals that numerous initiatives focus on the same technology areas. Our own examination shows that in eight technology areas, at least three of the four selected partnerships have active initiatives: heating and cooling; carbon capture, utilisation and storage (CCUS); nuclear; bioenergy and biofuels; wind; solar; smart grids; and hydrogen. The overlap becomes even more apparent when including other global, regional and thematic partnerships: for example, Technology Collaborations, MI, EU-ETIPs, the Biofuture Platform and the Global Bioenergy Partnership all focus on bioenergy. More generally, recent trends suggest that partnerships are increasingly centring on low-carbon energy sources and cross-cutting themes including systems integration.
Focusing on the same technologies across different partnerships may induce risks of duplication, thereby diluting policy maker attention and creating fundraising or political support challenges. That said, in some instances, activities may well address different aspects of the same technology area, justifying the overlap. Yet even in those cases, stakeholders have acknowledged that the perception of duplication may be enough to trigger a degree of competition between multilateral efforts. Policy makers would therefore benefit from identifying possible synergies between mechanisms to avoid replication of efforts while at the same time maximising complementarity.
Enhanced cross-mechanism collaboration may increase the impact of ongoing activities. For instance, co-locating stakeholder dialogue, events and roundtables may mobilise more actors and bring varied and valuable perspectives, attract attention from policy makers and enhance networking opportunities. Co-branding technology policy and market analyses may reveal new findings thanks to the combined experience, knowledge and networks of the initiatives involved. Collaboration between early-stage activities executing RD&D and initiatives providing competitive funding or grant opportunities may facilitate the development of energy technologies and their demonstration in real-life conditions or in strategic markets.
However, innovation stakeholders have also reported challenges in engaging with other collaborative mechanisms, in part because of a lack of systematic co-ordination processes. As a result, the number of interactions between existing partnerships, whether at the political or working level, remains low relative to the number of ongoing activities.
Despite these challenges, there are some initiatives that are already effectively collaborating across partnerships. For example, last year the co-leads of collaborative activities on smart grids under the International Smart Grid Action Network (ISGAN) (both a TCP and a CEM Initiative), identified a strategic opportunity to work more closely with the relevant Innovation Challenge under MI and formalised this co-operation.
Focus on emerging markets
Participation in collaborative partnerships continues to grow and diversify every year. IEA Members and Association countries currently account for the broadest participation in Technology Collaborations, CEM and MI, as illustrated by the “core” group of top-collaborators mentioned above.
While a strong central core of support is invaluable, an important trend for global innovation ecosystems is the increasing participation of emerging economies, such as China (currently a member of 23 Technology Collaborations), India (11), Mexico (10), South Africa (8) and Brazil (5).
Emerging market countries also tend to participate in regional partnerships, which allow governments that are not necessarily members of global efforts to benefit from international co-operation. The transition from regional to global collaboration is an encouraging trend for key emerging market countries, with which the IEA seeks to deepen engagement as part of the Clean Energy Transitions Programme (CETP).
Partnerships have made it clear that emerging economies are a top priority. As part of a survey conducted in 2019 by the IEA Secretariat, India was identified as a key prospective partner by 14 Technology Collaborations; Brazil by 12; Chile and China by 8; Mexico and Indonesia by 7. If prospective membership materialised, China would consolidate its high participation by holding membership in over 30 Technology Collaborations; India would join the “core” group of top-collaborative countries; and both Mexico and Brazil would be involved in over 15 Technology Collaborations.
Strengthening public-private cooperation
In addition to public agencies, private-sector actors play a critical role in RD&D and in ensuring key technologies reach markets. Examining both public and private contributions can help governments better understand the broader innovation ecosystem, engage with companies to leverage corporate expertise, influence and capital; and strategically allocate public funds in those energy sectors that remain underfunded or face financing access challenges.
While there is substantial interest from collaborative partnerships to deepen engagement with private-sector actors, this engagement is, at least for now, relatively uncommon. Among the four partnerships analysed in the report, only EU-ETIPs are co-led by industry stakeholders while some 80% of participants in Technology Collaborations are public bodies. For now, membership in MI and CEM is restricted to national governments, although engagement of private sector is actively sought and governments may designate in-country private sector experts to represent national interests in certain initiatives.
Different factors may be preventing companies from seeking engagement with government-led multilateral initiatives, including a lack of awareness of such programmes, differing working cultures between public and private actors, diverging priorities and little incentive to share information, and burdensome administrative procedures. On the other side, some stakeholders within collaborative partnerships remain reluctant to engage with industry, fearing the influence of corporate interests on their strategic decisions, work programmes or outputs. These reasonable concerns need to be overcome for effective public-private co-operation to take place.
Thankfully, we are seeing some positive developments. For instance, over 100 private-sector companies are now participating in the technical work of CEM activities, resulting from both CEM stakeholders reaching out to companies, and vice versa. In collaboration with the IEA, CEM also leads an Investment and Finance Initiative (CEM-IF) to help policy makers mobilise investments and financing, particularly from private sources, for clean energy deployment. Policy makers, collaborative partnerships and energy innovation stakeholders may benefit from further research on private-sector participation, building on these encouraging cases, to find ways to best leverage corporate capabilities.
As we continue to enhance our efforts related to technology innovation to support global energy transitions, the IEA encourages broad international collaboration to tackle pressing innovation gaps, share best practices and accelerate the deployment of clean energy technologies. Enhancing collaboration between existing initiatives, engaging with emerging markets and leveraging corporate capabilities, are three areas of promising focus for policy makers looking forward.
*Claire Hilton, Energy Partnerships Analyst.
Iran’s huge energy subsidies: supporting or battering the economy?
In one of its latest reports dubbed “World Energy Outlook 2018”, the International Energy Agency (IEA) has allocated a section to fossil-fuel subsidies. The IEA has gathered the information regarding different countries’ fossil-fuel consumption subsidies and presented it in a chart on top of which the name of “Iran” catches the eye.
Based on the report, in 2018 with $69 billion of subsidies allocated for various types of energy consumption including oil, natural gas and electricity, Iran holds the first place among the world’s top countries in terms of the amount of subsidies which is allocated to energy consumption.
According to the IEA report, in the mentioned year, Iran has allocated $26.6 billion, $16.6 billion and $26 billion of subsidies for oil, electricity and gas respectively.
Based on the data, the total amount of allocated subsidies equals 15 percent of the country’s total GDP.
But what this information means? How one should interpret seeing the name of “Iran” on top of a chart for countries with most energy consumption subsidies?
Three main purposes of energy subsidies
Energy subsidies for long have been used by governments all around the world for pursuing certain political, economic, social, or environmental agendas. In different countries, energy subsidies are provided in different forms and modalities with a direct or indirect outcome on energy production costs and/or final prices.
Iran, as one of the world’s top energy-rich countries, for long has been offering significant amounts of energy subsidies to (according to the government claims) reach three main targets:
1- To support the less privileged population of the society
2- To create and support job opportunities across the county
3- To support domestic production
Considering these major purposes assumed for allocating gigantic amounts of energy subsidies in Iran, the question is to what extend these goals have been reached so far?
The poor, the rich or the air pollution?
Regarding the support for the less-privileged classes of the society, a look at the gasoline subsidies which the Iranian government has been offering for all people, can show the extent of this approach’s inefficiency.
On one hand, many energy experts and scholars in the country believe that allocating great amounts of subsidies for gasoline is not in fact supporting the poor but it is more lifting the rich. They argue that most of the lower class population in the society do not use much gasoline in comparison to the upper classes with their luxury cars. That means the government is in fact supporting the upper classes’ luxurious lifestyle by providing them with cheap fuel which in fact they do not need.
On the other hand, many environmental experts believe that such subsidies are in fact encouraging people to consume more and to care less about the negative impact that they are leaving on the environment. Cheaper fuel means more careless consumption that is more consumption in fact. Most of Iran’s big cities are currently struggling with high levels of air pollution which is a direct outcome of the cheap fuel which is being consumed by everyone on a daily basis.
New job opportunities
One other argument that is behind the heavy energy subsidies in Iran, is to support and create new job opportunities. In this regard one major example could be the subsidy which is provided for the gas consumed by the industrial units.
An example in this area would be the best explanation to the question of how well this strategy has paid off.
In Iran a major part of the country’s gas is consumed in the industrial sector. In this particular example I want to take a look at the cement industry as a sample community. Every year in Iran, about 90 trillion rials (nearly $2.15 billion) is allocated to the gas subsidies used in the cement industry while based on the data provided by the industry ministry, the total revenues earned from this industry in the past Iranian calendar year (March 2018-March 2019) was reported to be 15 trillion rials (about $357 million).
Considering the revenue earned and the amount of subsidies, it is clear that 75 trillion rials is lost. Now the interesting part is that considering the fact that there are nearly 250,000 people working in the country’s cement industry, if the subsidies money was directly paid to the workers, each worker would earn 350 million rials, which is way more than most of their actual annual income level.
Supporting domestic production
The above example might make you think that the money has been spent to support the domestic production, as it has been stated as one of the main goals for energy subsidies.
It has been years that Iran is allocating subsidies for many industrial sectors, including the auto industry, the cement industry and etc. but the outcome has not been what is expected it to be.
Using more and more subsidies has made most industries less competitive and more reliant on outside sources for their inefficiencies.
One recent example is the emerging of the great number of Bitcoin mining farms all over the country. It was reported that even in many of the country’s industrial parks the production units were using the subsidized electricity to farm Bitcoin instead of producing what they were supposed to be making.
As many energy and economic analysts and scholars have stressed before, it is obvious and almost certainly we could say that allocating huge amounts of energy and fuel subsidies is not a good strategy to follow.
The budget that is allocated for subsidies every year could be spent in a variety of more purposeful, more fruitful areas. The country’s industry should compete in order to grow, people must learn to use more wisely and to protect the environment.
A government which provides irrational amounts of subsidies for energy consumption is just like a father who spoils his children by over-protecting and over-supporting them, those children, most probably, won’t turn out to be successful contributors to their society.
From our partner Tehran Times
In Myanmar, Better Oversight of Forests a Vital Step in Transition to Rule of Law
Authors: Art Blundell and Khin Saw Htay For the first time, the Myanmar Extractive Industries Transparency Initiative (MEITI) has opened...
Presidential elections – 2020, or does Trump have “federal reserve”?
On July 31, the US Federal Reserve’s Open Market Committee cut interest rates – the first such move in 11...
Short Letter vs. Long Telegram: US Ambassador Huntsman Departs Moscow
The resignation of US ambassador to Russia Jon Huntsman is a good occasion to take stock of one of the...
Internship tips from an intern who became an owner and CEO
Internships can be a valuable opportunity to start your full-time working career, and change your life. Fatih Ozmen went from...
Abrogation of Article 370 and Indian Plan for Plebiscite in Jammu & Kashmir
Since 2014 India is being ruled by a Hindu ultra-nationalist party of Bhartiya Jannta Party (BJP) and extremist Narendra Modi...
Addressing Economic Challenges in Africa Through Deep Investments
The African continent comprises a diverse collection of countries, each with its own set of challenges. The governance of individual...
The Threat to Life from Ocean Microplastics
Authors: Meena Miriam Yust and Arshad Khan When Chelsea Rochman at the University of Toronto and colleagues began their study on medakas...
Middle East1 day ago
“Today Saudi Arabia finally lost the war on Yemen.”
Southeast Asia3 days ago
South-East Asia youth survey: Skills prized over salary
South Asia2 days ago
The Likely Outcome of Narendra Modi’s Unconstitutional Seizure of Kashmir
Americas2 days ago
U.S.-North Korea Nuclear War: Assessing Plausible Risks
East Asia2 days ago
Deeper meanings of the Hong Kong protests: Is China a gamechanger or yet another winner?
Defense2 days ago
Kashmir: A Nuclear Flash Point
Middle East2 days ago
Business and boxing: two sides of the same coin
Americas1 day ago
The third Fox News shock to Trump