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Fear of sanctions drives petrol rationing plans in Iran

As Iran reluctantly begins implementing today a plan to reduce consumption of mostly imported petrol 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 consuliterant to Iran Khodro, the country’s largest automaker, said 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 petrol 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 liter 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. Besides sanctions, there has been concern at the rising cost of petrol imports. Aliterhough a major petroleum producer Iran has limited refining capacity. Consumption of gasoline has been increasing at the rate of 10% annually over the past few years.

The government will soon have to import around 40 million liter of gasoline a day if demand for gasoline is not cut down. 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. With a record liquidity growth of 42% the increase in the price of gas may lead to a drastic increase in inflation. Having this in mind, the government of President Ahmadinejad is very reluctant and very cautious about any increase in the price of gas.

Ahmadinejad’s reluctance to implement restrictions on petrol consumption, in the face of parliament’s urgent insistence, could be seen in the fact that the first phase starting today only covers government users. Rationing was to have been originally implemented from Jun. 8 on. 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% of the stations only to those who have smart cards.

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 budget, spent $5 billion to import gas to sell at a subsidized price of Rls.800 (approximately 8.5 cents per liter). The hard line 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 10% annually. 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. There are rumors that private cars will be allocated 3 to 4 liter 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). The use of smart cards and rationing is meant to decrease demand and, importantly, to prevent smuggling of some 10 million liter of gasoline a day from Iran to neighboring countries where the fuel is far dearer. The 25% hike in the price of gasoline introduced by the government recently does little harm to smugglers’ 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. Daily consumption of gasoline and domestic production stands between 75 to 80 million liter, leaving at least 30 million liter a day to be imported. In addition to gasoline there is also a demand for nearly 80 million liter 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 for gasoline imports the government needs to reduce its consumption to between 50 and 60 million liter 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. 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. (