TEHRAN – As Iran reluctantly begins implementing Thursday a plan to reduce consumption of mostly imported gasoline by cutting massive consumer subsidies, it is with an eye to possible tightening of international sanctions for the country’s controversial nuclear program.
Saeed Laylaz, economic observer and former consultant to Iran Khodro, the country’s largest automaker, told IPS that sanctions were an important factor in implementing a plan that could prove unpopular but still be insufficient to address the problem of rising costs of importing gasoline and refined oil.
"The government wants to reduce its dependence on gasoline imports but with what they have in mind demand is going to decrease only by around 20 million liters and we will still be hugely dependent on gasoline imports. The security aspect of the problem is very serious and compelling. Sanctions on gas imports can bring the system down to its knees within 48 hours and create havoc if the problem is not urgently and effectively addressed," Laylaz said.
In December the United Nations Security Council imposed the first round of sanctions on Iran and tightened them in March as Tehran refused to suspend uranium enrichment which it insists are intended purely to meet energy requirements.
On Wednesday, in a joint statement, Britain, France and Germany hinted at further sanctions. "Iran continues to ignore its obligations and has not taken any steps to build confidence in the exclusively peaceful nature of its program," the statement to the International Atomic Energy Agency said.
Besides sanctions, there has been concern at the rising cost of gasoline imports. Although a major petroleum producer Iran has limited refining capacity.
“Consumption of gasoline has been increasing at the rate of 10 percent annually over the past few years. The government will soon have to import around 40 million liters of gasoline a day if demand for gasoline is not cut down,” Laylaz said. “Importing this much gasoline will be an almost impossible task for economic reasons and for limitations of the domestic transportation structure.”
Iranian automakers have flooded the market with nearly a million cars a year over the past few years. Laylaz believes that with a record liquidity growth of 42 percent the increase in the price of gas may lead to a drastic increase in inflation. "Having this in mind, the government of President (Mahmoud) Ahmadinejad is very reluctant and very cautious about any increase in the price of gas," he said.
Ahmadinejad’s reluctance to implement restrictions on gasoline consumption, in the face of parliament’s urgent insistence, could be seen in the fact that the first phase starting Thursday only covers government users. Rationing was to have been originally implemented from Jun. 8.
“The start of first phase of gasoline rationing is only for government vehicles and will begin from midnight on Wednesday," Ali Akbar Mehrabian, head of special plans, was quoted as saying by the Islamic Republic News Agency (IRNA).
Smart cards have been introduced, but the owners of Iran’s nearly eight and a half million cars are still anxiously waiting to find out the quantity of subsidized fuel that will be allocated to each car by the government and the price at which non-subsidized gasoline will be sold.
Smart cards have not yet been delivered to around one million car owners but gasoline is now sold in more than 90 percent of the stations only to those who have smart cards.
A deputy oil minister was quoted in Iranian newspapers as advising those who have not received their smart cards to use the smart cards belonging to others for the time being.
The Iranian parliament has allocated 2.5 billion US dollars to the government for gasoline imports in the current fiscal year (Mar. 21, 2007-Mar. 20, 2008). Last year the government, initially allocated the same 2.5 billion dollar budget, spent five billion dollars to import gas to sell at a subsidized price of Rls.800 (approximately 8.5 cents per liter).
The hardline-dominated parliament had, three years earlier, rejected a bill by the reformist government of Mohammad Khatami to bring the price of gasoline closer to its real price through gradually cutting down gas subsidies and increasing the price by ten percent annually.
"Everybody can see that gasoline is excessively used and even wasted by careless people letting it overflow their fuel tanks in gas stations. It is too cheap, even cheaper than bottled water. But what can one do when in a city like Tehran with more than nine million residents we still don’t have proper public transportation. People need to use their private cars to get to work, to go places. I travel about 60 km daily inside the city to get to the office and back," a middle-class working resident of Tehran told IPS.
"Governments have always been promising better public transportation but have never delivered. And the fuel subsidies find their way into the pockets of the rich who can afford cars. The poor get little more than pollution, overcrowded buses and traffic jams," she said.
"I’ve heard that private cars will be allocated 3 to 4 liters of gasoline at Rls. 1,000 (nearly 11 cents) and any extra fuel is going to cost three to four times as much. A huge black market in forged smart cards has already started even before rationing is actually made effective. The cards are sold everywhere for around Rls. 150,000 (16 dollars)," she added.
The use of smart cards and rationing is meant to decrease demand and, importantly, to prevent smuggling of some 10 million liters of gasoline a day from Iran to neighboring countries where the fuel is far dearer.
"There is an organized network involved in gas smuggling that reaps millions of dollars from selling Iran’s subsidized gasoline in other countries. Many believe the organized networks have military affiliations and that they are the same groups that made it possible for Ahmadinejad to become president," a source in Tehran requesting anonymity told IPS.
"The 25 percent hike in the price of gasoline introduced by the government recently does little harm to their business as the current price is still one-fourth of the real price. Rationing will prevent smuggling only if subsidies for gasoline sold in excess of the rations are cut down totally or considerably, making smuggling unprofitable for these networks," he said.
Daily consumption of gasoline and domestic production stands between 75 to 80 million liters, leaving at least 30 million liters a day to be imported. In addition to gasoline there is also a demand for nearly 80 million liters of subsidized gas oil. There are no plans for rationing gas oil and the government recently managed to convince the parliament to restore the price of gas oil from Rls.450 (4.9 cents) per liter to last year’s price of Rls.160 (1.7 cents).
With an allocated budget of 2.5 billion dollars for gasoline imports the government needs to reduce its consumption to between 50 and 60 million liters a day in order to avoid recourse to the Oil Stabilization Fund for more gasoline imports as it did last year spending nearly all the government savings from higher oil prices in the world market than envisaged in the budget.
A closed session of the Iranian parliament with interior minister Mostafa Pour Mohammadi, held Jun. 11, on government plans to begin implementation of rationing reached no specific conclusion, Aftab News Agency quoted a member of parliament’s Energy Committee as saying. Full implementation of rationing, to be carried out in three stages as proposed by the interior minister, will need a month, the member said.
“Today the gasoline consumption amounts to around 80 million liters a day and it is much harder to increase prices compared to several years ago when the average daily consumption was 45 to 50 million liters a day," Laylaz said.
"Rationing gasoline is going to be one of the most difficult economic reforms since the Islamic revolution of 1978. The difference between the price it is sold at now (10 cents) and its real price (43 cents) has reached a dangerous level and any attempt to sell gas at its real price may lead to economic and social disaster or upheavals," he added.