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Do the Math: A Comprehensive Energy and Climate Policy Would Cut Iran’s Oil Revenue by $100 Million per Day

Dan Lashof

Posted April 12, 2010 in Solving Global Warming

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The Wonk Room over at Think Progress posted an important piece on Friday calculating that comprehensive energy and climate legislation would reduce Iran’s petrodollar receipts by $1.8 trillion through 2050, an average of $100 million per day. That’s a huge benefit considering Iran’s role as a destabilizing force in the Middle East and as a sponsor of extremist groups around the world.

The basic logic is straightforward: Burning gasoline and other petroleum products inherently produces heat-trapping carbon dioxide. As a result, any reasonably effective program to reduce carbon pollution must reduce the demand for oil. Econ 1 tells us that lower demand means lower prices. And lower world oil prices means less revenue for Iran.

Still, $100 million per day is a pretty striking number, so before propagating it I thought it would be worth checking the math. That too turns out to be straightforward, and about as solid as it gets when it comes to projections related to the price of oil.

Iran produces just over 4 million barrels of oil per day, so a $100 million per day drop in revenue implies a $25 per barrel reduction in the price of oil compared to what it would be without a comprehensive energy and climate plan. The Wonk Room analysis relied on an MIT study which analyzed the effects of a U.S. climate program in the context of similar international action, and the numbers come from comparing the world oil price in MIT’s climate policy scenario to MIT’s reference scenario.

It’s not a good idea to rely on a single economic model, so I compared MIT’s results to the International Energy Agency’s (IEA) World Energy Outlook analysis. IEA also produced a reference case and a climate policy case designed to stabilize the concentration of carbon dioxide in the atmosphere at 450 parts per million (ppm). There are many differences between the MIT and IEA models and their results. For one, the IEA analysis ends in 2030 whereas MIT’s extends through 2050. For another, the mix of biofuels and other low-carbon energy sources in their climate policy scenarios are quite different. Nonetheless, it turns out that IEA projects that the world oil price in its 450 ppm scenario will be $25 per barrel lower than in its reference scenario in 2030. This is the middle of MIT’s projection period, so IEA’s analysis provides strong corroboration for the estimate that Iran’s petrodollar revenues would fall by an average of $100 million per day due to a comprehensive energy and climate policy.

So go ahead and add that to the list of benefits from comprehensive climate and energy legislation: More jobs, less pollution, and $100 million per day fewer petrodollars for Iran to play with.

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