Iran takes early steps to resolve gas crisis
by Ali Arrehchi
10-03-07 The recent approval in Iran's Majlis (Parliament) of a mechanism
to ration gasoline may be a key step towards addressing what is widely
believed to be Iran's most pressing current economic challenge.
Iran's gasoline policies are particularly important because the price of
gasoline is intertwined with inflation, so any surge in the price of gas --
even rumours of a possible price hike -- can push up inflation.
The gas rationing mechanism creates a daunting task for the government of
President Ahmadinejad to limit its economic consequences. Under the new
measure, the government will put into effect a rationing mechanism as of
late May which will effectively increase the price of gas at the pumps while
limiting its supply.
Consumers will be able to buy 5 litres of gas per day at rials 1,000 (or
roughly 11 cents) per litre, up from the current price of rials 800. Drivers
who consume more than 5 litres per day will have to purchase the extra
volumes of gas at higher rates which will be determined later by the
government.
The approval of the new scheme was among the most critical aspects of the
annual budget bill for the next Iranian calendar year, which begins March
21. The measure provoked serious debate at the parliamentary chamber, where
several deputies continue to pursue changes in the new gas policy.
Although the principal justification for the measure was to decrease
domestic gas consumption, the situation is the result of several combined
factors -- cheap fuel, high consumption, dependence on imports and lack of
adequate funding.
Cheap fuel
Iranian drivers enjoy gas prices far lower than in any other country. The
government has long implemented a heavy blanket subsidy on gasoline so that
the price of gas which drivers pay at the pumps never compensates the actual
cost of delivering that gas to the consumer.
With such a cheap fuel supply at hand, Iranians have developed a
lackadaisical approach towards their gasoline consumption behaviour. The
cost of gas is so low that Iran is the biggest gasoline consumer in the
region.
High consumption
Iran's current gasoline consumption is about 80 mm litres per day, but cheap
gas prices are not the only factors encouraging high gas consumption in the
country. Iran has many older automobiles on its roads which burn more fuel
than newer models. Even the new domestically produced cars are sub-standard
for fuel efficiency.
Inadequate public transportation, particularly in Tehran, has also
encouraged citizens to take one-passenger rides, adding to Iran's already
high gas consumption.
Dependence on imports
Iran imports more than 20 mm litres of gasoline per day to meet its growing
domestic demand. The country is forced to import some of its gas because its
aging refineries cannot increase production. Private sector companies are
reluctant to invest in Iran's refinery development projects, partly because
the government cannot offer them a concrete repayment guarantee, and partly
because the financial justification for the investment is missing from the
industry's economic model.
The dependence on imports makes gasoline the Achilles' heel of Iran's
economy. Any disruption of gas imports or any increase in international
gasoline prices could severely shake the Iranian economy. As a result, Iran
is under constant pressure to allocate more funds from its economy to gas
imports and subsidies.
Lack of funds
The government has allocated $ 2.5 bn for gasoline imports from the budget
bill for the next calendar year. The funds for gas imports from last year's
Budget Law were $ 3 bn.
Those funds however were depleted shortly into the second half of the
calendar year and the government had to request more funds to support its
gas imports -- a gloomy scenario which has been repeated over the past few
years.
Iran needs to definitively resolve its gasoline problem. A main concern
is that Iran's heavy dependence on imports increases its economic
vulnerability. The most pressing issue however may be the heavy state
subsidies the government pays for its domestic gasoline supply, which amount
to $ 10 bn per year. Those subsidy monies could have been used for major
economic development plans -- including crucial industrial projects in
Yadavaran and Azadegan. Instead, Iran is effectively burning through its
available cash on gas subsidies.
New laws to facilitate investment in refinery development projects and to
promote domestic production are among the possible solutions to Iran's
gasoline crisis. The government can also consider specific bonus mechanisms
for companies planning to participate in a refinery project in Iran.
An expansion of public transportation can be a key to the solution, as
well as promoting new technologies like gas-to-liquid and compressed natural
gas as alternative sources of fuel for cars.
Gasoline is the most critical challenge threatening the Iranian economy
today. The new gasoline ration scheme may help Iran to meet this challenge
in the long term. What is crucial however is that the government performs
well in implementing the new policy while also addressing potential economic
consequences.
The government of President Ahmadinejad has already had some success with
other economic challenges. The rationing scheme may become a litmus test to
gage how capable the government will be in creating successful economic
policy.
What the administration wants to avoid seeing at all costs is deterioration
in inflation -- the trigger for broader criticism against the economic
performance of the government.
Source: www.presstv.ir / AA/MR/BG