Sunday, December 26, 2010

Post-Subsidy Iran: The Rising Oil Prices

By Nader Uskowi

The rising oil prices in recent weeks have created heightened optimism on part of Ahmadinejad administration about their chances of pulling off their subsidy reforms despite misgivings by the Majlis and a growing public anger at rapidly rising prices, estimated at 15-20% for household necessities. The government economists expect the oil prices to continue its rise past the $90 mark achieved in recent days to settle at around $100 in 2011.

The massive and ambitious reforms target highly subsidized energy and food products. In removing those subsidies, the government has chosen a radical path, “a surgery,” as Ahmadinejad has put it. The gasoline prices were quadrupled and on average the prices of targeted products rose by 270%. The approach was necessitated by the government’s shrinking treasury unable to meet the financial burden of massive subsidies, estimated by the government at some $100 billion annually. (Although this figure could not be the real cost to the government, but probably the opportunity cost based on FOB prices of energy products in the Persian Gulf.)

To ease the hardship on ordinary people, the government began to handout $40 a month to 80% of the population, a figure less than the rise in prices, hence the public resentment of the reforms during its first week of implementation. The $100 oil will give the government the ability to continue its $40 monthly handouts (a total of $2.4 billion a month) and even raise it, or “double” it as recently mentioned by Ahmadinejad. The hope would be that after two years of maintaining these payouts the market forces and the ensuing economic growth would raise people’s income, no longer requiring the monthly handouts.

The strategy is of course risky. There is no consensus among economists that the oil prices would be on the rise. The $100 figure was first suggested by Goldman Sachs few weeks ago. There are contrarian views of declining oil prices in the coming years, for example, due to unexpectedly higher efficiencies achieved in transport sectors globally.

And as always there is the big elephant in the room, the economic sanctions against the country, a subject not dealt with in any serious manner during the current debate on subsidy reforms inside Iran. The removal of these sanctions would have the same effects as high oil prices. Right now the government is forced to pay premium on products and services due to sanctions, eating away good portions of the premiums of high-price oil. The decision facing the government here is purely political, something the economist planners of subsidy reforms could not plan for. The upcoming Istanbul talks between Iran and the major powers will give Ahmadinejad administration the best opportunity for a compromise, resulting in lowering or altogether removal of the sanctions.

Higher oil prices and/or removal of the sanctions are what's needed for the subsidy reforms to have a chance at success.


Anonymous said...

Barring anything short of outright capitulation and regime change, there is zero chance the sanctions will be lifted. Iranian leaders know this, as do much of the populace.

What is defined by "success" in this reform? And, importantly, what sort of time frame is being taken into account for this definition?

Five years from now, it will be interesting to look back on this. I'm thinking the "success" hinges on how well the 60% bloc of the electorate that voted for Ahmadinejad in the 2009 election fares in this reform. Those are the folks that matter for this administration and the one after that.

Anonymous said...

"Right now the government is forced to pay premium on products and services due to sanctions, eating away good portions of the premiums of high-price oil. "

What products and services do the Iranian govt have to pay a "premium" on?

Anonymous said...

stop with giving people money to burn benzin and boiling the air.

Nader Uskowi said...

Anon 4:40 AM,

Almost all imports processed through international financial systems are purchased at a premium, including imports from Turkey.

Nader Uskowi said...

Anon 4:40 AM,

I meant to also give you a recent link on the subject:

Anonymous said...

thanks for the link Nader, but I just don't believe this. "4,262 barrels of jet fuel" went over the table to Iran, to satisfy US pressure, while untold barrels went unrecorded. Everybody is doing it, even US companies!

If this so called premium is the price Iran has to pay to maintain its independence then so be it, Iran has decided that it is a price worth paying.

The US also pays a premium in the loss of prestige and influence that it suffers in the greater middle east as a result of its antagonistic attitude towards Iran. Whether that is a price it's willing, or able, to bear in the longer term remains to be seen.

Nader Uskowi said...

Your main argument is political, not economic: paying the price for independence. That's precisely what I had said in the post, continuing with sanctions or finding a compromise out of them is a political decision for the Iranian leaders, not a question economic planners can tackle. But politicians MUST know the true cost of the sanctions, and then make their decision for the right reasons. The worst is to be against any compromise because of the belief that sanctions have no effects on the country's economy, a phrase you hear a lot coming from Tehran. Iran is paying a lot because of these sanctions.

On politics, as I have argued in the past, Iran has made its point: it is willing, ready and capable to enrich uranium at any grade and it has demonstrated its ability quite well, and all this in spite of sanctions and Western pressure. For those whose main goal in politics is independence, Iran had shown and proved its independence. Now is time to call it a win and begin concerted negotiations to end sanctions. Compromises, even on major questions, are necessary for a country's politics and diplomacy. Otherwise enemies should always fight, with peace out of question. It's high time now to be concerned about Iran's future and economy at time of peace.

Anonymous said...

Your points are well made Nader, but you should know that the price of Iran's independence is far more than the nuclear issue. The West demands that Iran assumes a subordinate position in regional affairs and restores the influence it had previously enjoyed in Iranian affairs. The nuclear issue is merely the thin edge of the wedge.

Regarding economics and politics, I am surprised to hear you try to make such a distinction in this age of TARPS, QE2, economic sanctions, and the financial pressure unleashed on Wikileaks through so called apolitical institutions like Paypal.

The realm of economics and politics have never been so entwined, US political decisions impose an economic cost on the US, and ditto for Iran. For example the US sells weapons to Arab states, and thus has to beef up Israel militarily, thus antagonizing the Syrians who then splurge on Russian arms, thereby undermining US attempts to isolate Syria, and influence events in Lebanon. Iran plays the same game, on the same playing field, in a realist, and cost-beneficial capacity. To demand any less is to ask Iran to close its eyes to world realities and surrender to Western propaganda, and dubious promises.

Nader Uskowi said...

ou paint a dark and pessimistic picture of Iran’s future, a country whose mission is to defeat the West and its allies at any price, as though it is a last bastion anti-hegemony. That’s not Iran’s mission. The country is blessed with enormous natural resources and enjoys enviable human resources, young, educated and progressive. Iran’s mission is to build upon these strengths and create a regional powerhouse, not just on military hardware but mainly on a developed and strong economy and a developed political system that can sustain such economy.

This is not to argue for surrender. But a plea to common sense that once Iran has made its case for independence, which it has, it’s time even to come to terms with its enemies. The goal must be the country’s own future. I see a strong tendency along these lines in the country, including inside the presidential palace.

Nader Uskowi said...

My comments should have started with a 'Y", as you paint a dark and...

Anonymous said...

No Nader, what Iran wants, and I want, is to be treated as an equal. Not as a Western surrogate, and oil pump. Why this should be controversial for you is confusing. Iran would not be the first, nor the last nation to demand its cultural, economic, and psychic independence, and win it in the face of reluctant and antagonistic western powers, and a deflated and tired exiled diaspora.

Even now it is obvious that the West remains hostile to the independence of states that they largely regard at best as allies, and at worst as vassals. For example Turkey. If Turkey can get such a kicking for merely insisting on justice for Palestinians in general, and Gazans in particular, what hope does Iran have, in the present disposition of world political power, of ever being accepted as an equal on a level playing field?

You seem to be advocating that Iran declare victory as it surrenders, and if that is the case then I find it sad and dishonourable that you as an Iranian would advocate such a move, and if other countries had chosen your advocated path South Africa would not have a black majority govt, China would not have Hong Kong, Lebanon would still be occupied by the Israelis, the French would still be in Vietnam and Algeria, etc.

WMD said...

Thank you mr. Anonymous! I can go AFK again and enjoy my holidays.

Nader Uskowi said...

Sloganeering can not substitute for good policy. My hope is that the leaders in Iran would not fall into your trap. The country is independent, does not need Western certification for its independence. The country has enriched uranium against all odds and despite the sanctions, and it can declare victory, and rightly so. It is time to move on and start a new chapter in the country's economic independence, which can only be achieved with massive development programs. Subsidy reforms is the start. When Iran becomes powerful economically, it would not need anyone's certification of its power and influence.

Anonymous said...

well said NADER

get used to calling it isle of Britain in retaliation for the wrong names used for the Persian gulf

Dariush London (isle of Britain)

Anonymous said...

"When Iran becomes powerful economically, it would not need anyone's certification of its power and influence."

Really Nader? You must live in some utopian wonderland. Go tell that to the Russians and Chinese, or to Turkey and Brazil for that matter.

Your theories are beautiful Nader, shame that they have no real world application and, luckily for the Iranian people, they will be ignored.

Anonymous said...

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