Tuesday, July 11, 2006

Iranians driven to distraction by fuel imports

Gareth Smyth, The Financial Times:
With international tensions pushing prices upwards, Iran’s income from crude oil is set to rise 23 per cent to 54bn dollars in the current Iranian year. But a painful downside comes in the surging cost of imported petrol. The Islamic republic imports about 40 per cent of the 73m litres guzzled every day by motorists and now faces some hard choices.

With a $2.5bn (€1.9bn, £1.4bn) allocation for imports due to run out by the end of August, parliament and the government of President Mahmoud Ahmadi-Nejad must ration petrol or allocate $5bn to make up the shortfall.

The most obvious option – increasing prices from a subsidised 9 cents a litre, among the world’s cheapest – is ruled out for fear of social unrest. “They can’t do it, there would be a revolution,” is the received wisdom of Tehran taxi drivers.

Gholam-Hossein Elham, the government spokesman, recently warned the media against “negative reports about price rises” but said rationing was on the way. Kazem Vaziri-Hamaneh, the oil minister, has said rationing after September 23 would limit each car, other than taxis, to 5 litres a day, half the average consumption.

However, Iraj Nadimi, a member of parliament’s economic commission, said on Sunday that government and legislators lacked “the necessary courage” to approve rationing. READ MORE

Some reports suggest many deputies favour dual pricing, under which domestic petrol would be rationed and imported fuel sold at cost. But the prospect of the pumps running dry has not as yet produced a consensus on what to do. Six ministers met leading deputies yesterday, but there was no news of a breakthrough.

Iran’s argument over petrol has engulfed media, parliament, ministers and ordinary Iranians – exposing not just poor management but the government’s overbearing role in directing the economy.

Iran, which has the world’s second highest reserves, has long relied on oil exports that account for 80 per cent of foreign earnings, fostering a state-directed economy in which citizens expect the government to deliver tangible benefits.

The government of Mr Ahmadi-Nejad took office last year with promises to improve the lot of the poor by bringing “oil money to the sofreh [dining cloth]”. Parliament, under conservative control for two years, broadly backs this. Deputies, who agreed a budget rise of about 20 per cent for this year, want to maintain subsidies on staples including bread and electricity.

Low petrol prices have encouraged smuggling of 5m-8m litres a day into neighbouring Iraq, the UAE, Turkey, Pakistan and Afghanistan. Mohammad Reza Naqdi, head of the Headquarters for Fighting the Smuggling of Goods and Hard Currency, recently said most smuggled fuel left by sea.

Iranian politicians agree the most effective way to reduce petrol imports would be to improve refining, hence government plans to invest $15bn over five years to increase daily output from 40m litres to 92m litres, revamping the country’s five refineries and building three new ones.

But progress has been slow. And with foreign investors wary of government policies and possible UN economic sanctions due to Iran’s nuclear programme, analysts doubt refineries will ever meet demand that is growing at 15 per cent a year as a result of an increasing number of cars produced mainly by government-owned companies.

Some sceptics argue government and parliament are avoiding responsibility and that deputies, afraid of being blamed for price increases or rationing, will release the requisite $5bn and allow petrol guzzling at current prices for the rest of the year.

But the government’s strongest critics argue the whole debate misses the point. Earlier this month 50 prominent economists wrote an open letter to Mr Ahmadi-Nejad criticising excessive state direction of the economy and advocating market-led solutions.