Iran 'will Need 5bn Dollars Subsidy' to Avoid Petrol Rationing

Gareth Smyth, The Financial Times:

A leading Iranian parliamentarian on Sunday warned President Mahmoud Ahmadi-Nejad he would need to spend an extra 5bn Dollars this year to pay for subsidies on sales to motorists of imported petrol and diesel to avoid politically sensitive rationing. READ MORE

Kamal Daneshyar, head of the parliament’s energy commission, told Reuters the government needed to withdraw the money from the Oil Stabilisation Fund (OSF), which collects windfall oil revenue for contingencies and investment. He later told the FT this was in addition to the $2.5bn (€2bn, £1.3bn) already allocated in the budget for the year March 2006-March 2007.

But the allocation of OSF funds to maintain subsidies would fly in the face of Mr Ahmadi-Nejad’s promises to maximise spending on capital projects, especially in Iran’s regions.

Current government spending is already due to rise 20.5 per cent in the current year, according to Iran Economics, the leading Tehran monthly. With inflation put officially at 13.5 per cent, this represents a significant increase in real terms.

The fiscal pressure over petrol imports results from the antiquated state of Iran’s refineries and subsidies which keep the price for motorists at 9 cents a litre.

Despite having the world’s second-largest proven crude oil reserves, Iran imports around 40 per cent of its petrol. So while rising global oil prices boost Iranian coffers and are celebrated by Mr Ahmadi-Nejad, the subsequent rise in imported petrol prices has become a domestic issue.

Little progress has been made on a $15bn plan to revamp five existing refineries, build three new ones, and so increase production over five years from 40m litres a day to 92m litres.

Mr Daneshyar ruled out an earlier proposal, discussed in government and parliament, for two-tier pricing later in the year to sell imported petrol at cost to motorists. He said this would be “illegal” as the government lacked time to meet 25 targets set by the energy commission, including improving public transport.

With more and more cars throttling Tehran’s streets and the average motorist using 10 litres per day, double the world average, the World Bank in March estimated total losses from air pollution in Iran at $10.3bn by 2009, $14bn in 2014 and $19.2bn in 2019.

But many politicians oppose higher petrol prices as either inflationary or politically sensitive, even though around 8m litres of subsidised petrol are daily smuggled into Afghanistan, Iraq, Turkmenistan, Turkey and the UAE.

With Mr Ahmadi-Nejad’s popularity holding up, his centrist opponents are discussing plans for a common front against him.

The Iranian media reported on Sunday that three leading figures – including two former presidents Mohammad Khatami and Akbar Hashemi Rafsanjani plus Mehdi Karrubi, former parliamentary speaker – were discussing a common slate for both November’s election for the assembly of experts, which chooses Iran’s supreme leader, and for local elections next March.