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Weaning Off Oil: Fact or Fiction?

Weaning Off Oil: Fact or Fiction?Weaning Off Oil: Fact or Fiction?

On the sidelines of a ceremony to mark the national day of research, Mohammad Bagher Nobakht, government spokesman, told reporters that "national resources are enough to disengage the economy from oil in a way that economic growth will continue, though with difficulty." The remarks are made despite the fact that at least one third of the government revenues next year are projected to come from oil exports.

Some economists and experts believe otherwise, however. Ali Dadpay is an Associate Professor of Economics in Clayton State University's College of Business. He considers the statement by Nobakht as merely a "morale booster" in an interview that has been published in the current issue of the weekly Tejarat-e Farda.

"Theoretically speaking, it is possible to run the economy without oil revenues," Dadpay added, saying, "But the question is whether it is also possible in practice while government-owned companies do not produce any revenues and are merely a cost burden."

"In addition, Iran's economy is not fully market-based so that the price signals generated in the markets direct the economy to the right path," the academic stated.

Dadpay believes Iranian governments have wasted a decade of oil price boom with irresponsible spending. The officials here have neglected the fact that global energy consumption patterns have changed, he said.

In 1970s, when oil prices hiked all of a sudden, many countries in the world made strenuous efforts and huge investments to develop energy-efficient technology in all areas and reduce energy consumption. At the same time, unlike the oil producing countries, the developed countries have always strived to safeguard their economies against oil market volatilities and become energy-independent. "That is why the US started shale oil production to meet its domestic demands," Dadpay noted.

  Alternative Revenue Sources

The university professor added that there's a general consensus in the country on the need to focus on alternative ways of revenue generation as the only way to translate the theory into action and said: "Those industries that create real export income for the country should be supported. Target markets should be developed, tax systems should be reformed and many other similar actions should be taken before it's too late."

State-owned companies account for 71 percent of the annual budget while the private enterprises share only 29 percent of the budget. "If the state-owned companies improve their management and also their productivity rate, the economy can gradually grow independent from oil," Dadpay said.

He said that in Iran, many industrial units only seek to obtain facilities from the government under the pretense of spending on manufacturing while the money has never resulted in production of high-quality goods. In the meantime, while considerable resources are allocated to build infrastructure in different industries, namely auto industry and tourism, "no feedback on their extent of success and their impact on the growth of these sectors is at hand," Dadpay stated. In other words, the allocated resources by the government do not generate the desired results, Dadpay noted.

He further stated that in the absence of a market-oriented economy that would reflect real gains and losses, interest rates and prices, resource allocation by the government will always go wrong. As a clear example, he referred to the domestic auto industry that is largely supported by the government financially but generates no concrete revenues. Therefore, he concluded that the economy needs oil to cover up these inefficiencies.

Despite the existing picture, Dadpay said "it is possible to run the economy without oil as it was in the beginning of the 20th century when the national railroad was built relying only on sugar export revenue."

However, he considered that the large size of the government that can only survive by oil revenues hurdles such achievement while oil could serve as a comparative advantage. "Those sectors of the economy that can survive without oil should be indentified," he asserted. However, such risk may result in dissatisfaction that will eventually grow as the profitable sectors would feel marginalized in the absence of support from oil revenues.

 

Financialtribune.com