Saturday, June 16, 2007

Gasoline Crisis in Iran

The inability of Ahmadinejad’s government to tackle the growing problem of gasoline consumption in the country and its devastating effect on the economy is a preview of worst days ahead. First, the related facts:

- During the two years of Ahamidenejad’s presidency, the oil prices have risen by $15 a barrel.

- The extra cash has not been invested in long-term development projects and unlike all other Persian Gulf oil producing states, Iran has not used the added income to diversify its economy. Instead, the huge amount of the extra cash on hand has been transformed into more imports and more consumption.

- Greater consumption has, among other things, resulted in the purchase of nearly a million new cars a year. Parallel to this, the gasoline consumption has risen at rates unprecedented in the country.

- The daily gasoline consumption is reaching 80 million liters a day (more than 21 million gallons a day).

- During the past 28 years, the country’s oil refining capacity has not increased appreciably. As the result, with 80 million liters of gasoline consumption a day, Iran needs to import between 30 million to 40 million liters of gasoline a day to meet the demand.

- In addition to gasoline, the government also needs to import some 30 million liters a day of diesel fuel.

- If the country continues to import gasoline and diesel at such levels, it needs to spend nearly all its “Oil Stabilization Fund,” the savings from higher oil prices than budgeted.

In face of such crisis, what has the government done?

- It increased the gasoline price to 100 toumans a liter (41 cents a gallon). This is still among the cheapest gasoline in the world, and it will not curb the demand significantly. And the government actually restored back the price of diesel fuel from 45 toumans a liter (18 cents a gallon) to 16 toumans a liter (6 cents a gallon); basically free!

- The increase of gasoline price to 41 cents a gallon has already worsened the inflation rate, estimated by Iran economic analysts to be at more than 20% annually.

- For fear of added inflationary pressures and popular unrest the government appears to be unwilling to curb the consumption levels through any further price increases.

- As an alternative, the government wanted to ration the gasoline consumption. The reports from Tehran indicate that the plan was to ration 3-4 liters (1 gallon) of gasoline a day at 100 toumans per liter (41 cents/gallon), with additional consumption at four times that price. The plan was postponed after a closed-door meeting of Majlis last Monday resulted in no decision to ration the consumption yet.

- On the whole the government (including Majlis) does not have the political will to tackle this growing problem.

The implications of the government inability to formulate a coherent policy to deal with the crisis are huge. The country is spending all its new-found fortune as the result of increase in oil prices on imported gasoline and diesel fuel. The crisis also has two other profound implications:

- If the West imposes a UN-sponsored sanction against sale of gasoline to Iran, the economy and the whole country will come to its knees within a few days.

- In the absence of any sanctions, the current expenditure on gasoline subsidies will worsen the inflation, already at more than 20%. Inflations at that level can bring, and have brought down governments in Iran.

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