Monday, July 03, 2006

How Did Oil Power Iran Fall Into a Petrol Crisis?

Alireza Ronaghi and Christian Oliver, Reuters:
"One million bicycles do not cause as much pollution as a single car," reads a well-meaning but futile mural above a petrol station in central Tehran. At the pumps below, the motorists wastefully slopping highly-subsidised gasoline down the sides of their vehicles have no intention of switching to two wheels.

Cheap fuel is seen as a national right in the world's number four crude producer, so drivers are bitter about the government's assertion that rationing could be imminent.

"Rationing would be a negative step. Why can they not just build a couple more refineries?" asked taxi driver Mohammad Moaveni, who shuttles between Tehran and its western satellite town of Karaj.

"It will open up the black market because people will start buying and selling their ration coupons," he added. READ MORE

Any decision on rationing gasoline will be scrutinised by officials wary of social discontent and energy traders who dispatch a gasoline tanker to Iranian quaysides every two days.

Highly subsidised gasoline imports have landed Iran in a big mess. Its cities are dangerously polluted and economists see largesse on subsidies as one of the core reasons why Iran's flaccid industry is so uncompetitive.

Iranian security officials fear their country's dependence on imported gasoline could leave it highly vulnerable to any U.N. sanctions imposed over its disputed atomic programme.

Furthermore, nine cent per litre gasoline ensures Iran effectively subsidises neighbouring states through contraband traffic in fuel.

Despite being OPEC's second biggest exporter, Iran needs to import some 40 percent of the 70 million litres of gasoline it burns each day owing to a lack of refinery capacity.

Parliament has forced action in the year to March 2007, slashing the budget for petrol imports. This should mean the government will either have to ration or raise prices -- both politically inflamatory moves that could stir unrest.

Interior Minister Mostafa Pourmohammadi and Oil Minister Kazem Vaziri-Hamaneh say the government favours stopping imports and introducing rationing, fearing that price hikes could stoke inflation already running at 12.1 percent.


Iran's troubles are rooted in the different priorities of populist governments with short-term agendas and oil officials.

The oil ministry and state oil company, which have advocated building refineries, cannot get access to a slice of the budget.

"Economic decisions are contaminated with populist policies. Within the last 40 years the issue has grown more severe every year and no government has actually had the will to solve it," said independent economic analyst Saeed Leylaz.

"The oil ministry has never been given the appropriate budget," he added.

But Leylaz, formerly a consultant to the motor industry, said Iran could already produce the fuel it needed and it was simply the cheapness of petrol that created a culture of wastefulness and brought about the crisis.

"Some 250,000 litres of petrol spills out on filling station floors every day ... Like any other merchandise, the gasoline price defines the mentality by which it is consumed. Iranians do not waste saffron and caviar," he continued.

This rampant gasoline consumption has been compounded by a boom in car sales.

Iran has turned into a regional carmaking hub with foreign firms such as Renault, Peugeot and Hyundai signing production deals in the Islamic Republic.

Although these were originally seen as export ventures, Iran's increased earnings from oil sales and a growing culture of cheap loans mean Iranians are buying more cars.


Some Iranian politicians say the people will stoically accept restrictions on their gas-guzzling lifestyles as they did during the 1980-1988 war with Iraq.

Others say the government knows it has to be cautious about upsetting the balance in a country where the whole economy is dependent on road transport.

Tehran mayor Mohammad Baqer Qalibaf told Iranian newspapers a change in fuel policy could be dangerous if it were to cause public transport chaos. Fuel price rises have traditionally spurred inflation.

"It takes a brave decision to rectify the subsidies," said Kamal Daneshyar, head of parliament's energy commission.

"The government is worried that people may feel discontent if the prices become real. That is why the government acts cautiously," he added.

Oil Minister Vaziri-Hamaneh has already missed a date by which he said the government would make a formal announcement on rationing.

International energy traders doubt Iran will have the political guts to turn away the 15 or so tankers filled with gasoline that dock there each month.

The energy commission has itself suggested that Tehran should take the easy option and pay for more gasoline imports with money from the foreign currency reserves, brimming with petrodollars while world oil prices flirt with record highs.

Although the central bank advises against potentially inflationary raids on the dollar reserves, such a move would offer President Mahmoud Ahmadinejad's government a way to douse a political powder-keg.