by Sara Vakhshouri
This week Iranians began dealing with a new phase of reduced fuel subsidies and increased gasoline prices. The new gasoline prices were announced at midnight on April 24 by the National Iranian Oil Refining and Distribution Company (NIORDC).The price for the semi-subsidized gasoline will be 7,000 rials per liter [...]]]>
by Sara Vakhshouri
This week Iranians began dealing with a new phase of reduced fuel subsidies and increased gasoline prices. The new gasoline prices were announced at midnight on April 24 by the National Iranian Oil Refining and Distribution Company (NIORDC).The price for the semi-subsidized gasoline will be 7,000 rials per liter (27 cents) and 10,000 rials (42 cents) for free market price gasoline. That’s a considerable jump from the 4,000 rials (16 cents) per litre for the semi-subsidized gasoline and 7,000 rials for free market price gasoline.
The current gasoline subsidy reductions are part of the “second phase” of the subsidies reform plan in Iran, which was passed by the Parliament on January 5, 2010. The government announced that people could still use the remaining share of the subsidized gasoline with the previous price in their fuel cards after the price change. Each car has a fuel card with 60 liters of semi-subsidized gasoline a month and once they use up their share, they will have to purchase gasoline at the free market price.
Following the price increase announcement, the average consumption of gasoline in Iran spiked massively. Average gasoline consumption in Iran fluctuates between 66 and 70 million liters per day. This number reaches over 70 million during seasons of high demand, particularly around the Persian New Year in March. Of course, this past week average gasoline consumption increased significantly. According to the NIORD, gasoline consumption on Saturday, April 19, rose to 80.7 million liters — and the next day it reached 94 million. Although this number eventually dropped back to 76 million liters, it was still up 6 million a day from the previous week. The spike in gasoline consumption strongly suggests that people are storing gasoline in anticipation of their remaining subsidized shares being cancelled. The head of Iran’s Gas Station Owners Association, Bijan Haj Mohammadreza, said that Iranians are “storing gasoline in non-standard containers” in anticipation of rising prices.
Indeed, domestic gasoline supply and the direct influence of its prices on inflation and standards of living have always been Iran’s Achilles’ heel. Subsidized gasoline prices have created an expectation of, if not demand for, lower prices. This is something that the government in Tehran has to manage. The subsidies reform plan has thus far helped the Iranian government somewhat control domestic gasoline consumption, and to a certain degree also aided efforts aimed at preventing smuggling to neighboring countries.
Why Iran needs subsidy reform
Reducing Iran’s gasoline subsidies would initially reduce the gap between international and domestic prices. It would also help the government save money and better manage its domestic consumption. According to Iran’s Fifth Five-Year Development Plan, domestic gasoline prices should rise to about 90 percent of the free on board prices of the Persian Gulf by the end of the fifth plan in the next year and half.
However, Iran’s current gasoline prices lag far behind the plan. The inflation resulting from sanctions, coupled with currency devaluation, has prevented the government from increasing gasoline prices since 2011. The rial’s devaluation has also increased the gap between international and domestic gasoline prices. The first phase of Iran’s subsidies reform was attempted by former President Mahmoud Ahmadinejad. At that time, the US dollar amounted to about 1,000 rials, and Iran could mange an increase in gasoline prices from 10 to 40 cents a liter (at the previous price of 4,000 rials a liter). Yet for the past two years, with gasoline prices at the same rate of 4,000 rials, prices once again were forced down to 16 cents a liter.
Petrochemical facilities halting gasoline production
Iran’s dependency on gasoline imports has been a bottleneck issue for the country. During the Ahmadinejad government, Iranian petrochemical factories started to change their production line in order to produce gasoline and reduce their dependency on imports. Iranian petrochemical facilities managed to produce gasoline with 95 octanes, which is generally considered a good quality gasoline. However, the aromatic contents of this gasoline fell well short of international standards, and significantly contributed to air pollution, particularly in Tehran.
However, the “petroleum team” of Iran’s new president has stated on different occasions that Iran is planning to increase its gasoline imports to reduce air pollution. Aside from making air more breathable, this would also, crucially, allow petrochemical factories to return to their planned production line and produce higher profits by exporting their products to the international markets.
Iran currently imports around 3.5 million liters of gasoline a day. According to the director of NIORDC, Abbas Kazemi, this number will increase almost threefold to almost 10 million liters per day. Iranian refineries currently produce around 60 million liters of gasoline a day, up from the 48 million liters per day they produced in 2012.
Over the past few years Iran has been planning to increase its refinery capacity and gasoline production. Iranian petroleum officials are aiming for self-sufficiency by March of 2015, when construction on the Persian Gulf Star Refinery is expected to be complete. Based in Assalouyeh, South Pars, this refinery has a total capacity of processing 360,000 barrels of gas condensate. Seventy-five percent of this gas condensate will be converted to gasoline and diesel oil.
Iran’s current gasoline subsidies reduction plan, which is part of a broader attempt at reforming Iran’s subsidies, could stoke inflation, which will be tough for average Iranian families. But in the long-term, this strategy will help Iran manage its domestic fuel consumption, which will save money for the Iranian government and increase the value of its petroleum products.
]]>by Djavad Salehi-Isfahani
Four months after the collapse of the rial earlier this fall, Iran’s economy is still reeling from its effects. The rial lost 40% of its value in one week late last September, succumbing to accumulating pressures from free spending by the Ahmadinejad government, overvaluation caused by years of [...]]]>
by Djavad Salehi-Isfahani
Four months after the collapse of the rial earlier this fall, Iran’s economy is still reeling from its effects. The rial lost 40% of its value in one week late last September, succumbing to accumulating pressures from free spending by the Ahmadinejad government, overvaluation caused by years of booming oil revenues, and international sanctions.
Financial sanctions imposed by the United States against third-party countries that trade with Iran have seriously disrupted Iran’s international trade, reducing its ability to sell its oil or spend the revenues from what it can sell. Sanctions have inflicted enormous pain on millions of Iranians, who have watched the boom of the last decade deteriorate into stagnation, inflation triple and critical items such as medicine disappear from stores. Iranians are meanwhile unsure who to blame, those who have imposed the collective punishment or their own government.
For the moment, there is no sign that what the West was hoping sanctions would do — soften the position of Iran’s leaders as a result of rising dissatisfaction — is actually happening. There are three reasons for this. First, the government has so far skillfully protected the poor from the worst aspects of the economic crisis. It has done so by offering cash payments (amounting to half the minimum wage for a family of four), and by keeping the price of basic necessities like food and fuel from rising as fast as inflation.
Second, those who suffer most — the salaried middle class — are least likely to pour into the streets in protest. And third, even those who believe that sanctions are the root cause of the current economic mess are not likely to ask their government to capitulate to Western demands.
Bringing inflation down and reviving investment are the two biggest challenges that the Iranian government currently faces. There are signs that inflation, after jumping to 4.5% per month (equal to an annual rate of 70%) during October and November, is coming down. Monthly inflation was 2.5% in December and fell to 1.7% in January 2013.
The moderation in inflation is no thanks to Iran’s free-spending president, whose two most important programs — cash subsidies and an expensive low-cost housing program — have been largely financed by printing money. The parliament has been trying to rein him in, and even tried to fire his Central Banker last month on a charge that he had raided the reserves of member banks, a move that had ironically helped reduce inflation.
But success in harnessing inflation will not shield the population from the worst effects of the sanctions. The government has done well in fighting them by finding alternative sources of supply for basic imports, and has successfully engaged in bilateral trade with several countries that are willing to withstand the wrath of Washington such as China, India, Turkey and Argentina, but it will have a very hard time getting private investment back on track with cumbersome arrangements for international trade.
Iran’s private sector is the main source of jobs for the country’s 20 million youth, and the only hope for its 4 million unemployed. The more realistic value of the rial after devaluation has done much to bring the productivity of these youth closer to their wages, which should boost their employment. But uncertainty surrounding the future of the dispute with the West will keep private money on the sideline and in liquid assets, waiting for a sign that normal times are about to return.
Remarks by US Vice President Joe Biden and Iran’s Foreign Minister Ali Akbar Salehi this past weekend that raised the prospects of direct talks between the US and Iran was perhaps a sign, for it immediately sent the rial up against the dollar by nearly 5% in the free market for foreign exchange. If this means that Iran’s private investors have not given up on the country’s future, it should serve as an inducement for Iranian leaders to do their best to reduce tensions with the West — even better, to resolve the nuclear standoff once and for all.
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