Iranians, unlike Americans, bid goodbye to cheap petrol

Jyotsna Ravishankar finds out why Opec’s second largest exporter of crude oil is forced to ration fuel.

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By  Jyotsna Ravishankar Published  July 4, 2006

After threatening the world with using oil as a weapon, Iran has ironically announced fuel rationing in the Islamic republic starting September. Despite being Opec’s second largest exporter of crude oil, Iran will not be able to supply its motorists with petrol. Years of under investment in the downstream sector have reduced Iran to its current state—it imports more than 40% of the 70 million litres (440,000 barrels) of petrol that its motorists consume daily. Iran’s refineries only have a capacity of 40 million litres of petrol a day, and the shortfall has up to now been met by spending billions of dollars each year on imported petrol. Most of this petrol comes from India, and is shipped to Iran through traders based in Western Europe, including its leading supplier, Vitol. In February, Iran’s parliament slashed the government’s requested US $4 billion budget for petrol imports to $2.5 billion. That lower amount will only cover half of Iran’s needs, due to higher import prices and increasing consumption. Parliament subsequently backed a government initiative to reduce domestic petrol consumption by limiting access to subsidised fuel. Though alternatives to fuel rationing were widely speculated about last month, Iranian oil minister, Kazem Vaziri Hamaneh did not mince his words in an address to the nation, via state television. “As there is nothing provided for petrol imports in the second half of this [Iranian] year’s budget ... the imports will naturally stop and petrol will be rationed,” he said. The second half of the Iranian year begins on September 23. Hardliner president Mahmoud Ahmadinejad has approved the plan, although he has been seen as a champion of the poor. This surprise move may not go down very favourably with his voter base. But, according to the announcement car owners would be provided with “smart cards” that allow petrol purchases at the subsidised nine cent per litre rates up to a fixed ceiling, above which motorists would have to pay the full price. “It would be ideal that petrol stations be provided with ‘smart card’ (technology) within the next three months,” said a member of the parliamentary energy committee Javad Saadunzadeh. The head of the committee, Kamal Daneshyar, previously said that private cars and taxis would receive three litres, and 30 litres daily, respectively, at a subsidised price. The government does have an option, at a time of windfall oil revenues to keep on subsidising imports. A bill was passed before the budget that allows the government to use $2.93 billion from the Oil Stabilisation Fund—set up to pool oil export earnings in the event of revenue being in excess of budget predictions— to buy petrol refined abroad up to March 2006. However, it is considered unlikely that parliament will approve such a measure in the current Iranian year. “Withdrawing cash from the Oil Stabilisation Fund to supply domestic petrol use...definitely contradicts the macro policies for reducing consumption in the fourth development plan,” said Saadunzadeh. Political analysts think that rationing may have a geopolitical motive: Iran could prove highly vulnerable to sanctions on its petrol imports, if the United Nations takes tough action over its controversial nuclear programme. “Gasoline [petrol] imports are Iran’s weakest link, especially if the UN decides to impose economic sanctions on Iran,” said A F AlHajji, analyst and associate professor, Ohio Northern University. AlHajji further argues that by reducing petrol imports the Iranian government will have more room to manoeuvre in its bargaining with the West. However, he agrees this action raises several questions including: Is Iran planning to shock the world with another surprise on the nuclear front? Does Iran expect its negotiations with the West to reach a dead end? The analyst said that future oil prices would depend on the answer to these questions, and the US and world community’s reaction to Iran’s moves. No matter what Iran does oil prices will keep rising, but the magnitude of the increase will be influenced by the degree of surprise Iran can achieve with its strategies and actions and on the UN’s reaction to it, he said. Though Ahmadinejad may go ahead with fuel rationing to buffer Iran against the West, the move may bring about social unrest, argue experts. There are some, like the private intelligence agency Strategic Forecasting (Stratfor), who believe that this announcement is an intelligent ploy made by Iran to prevent sanctions, and that there may be no fuel rationing at all. “Iran could be pre-empting these sanctions by cutting off its petrol imports and reducing its dependence on Western markets. “The Iranian public could then be softened up for a reduction in petrol subsidies should the nuclear talks shift course, resulting in the imposition of meaningful sanctions that affected the Iranian public at the pump,” Stratfor said. Tehran’s harsh measure of introducing rationing, despite enjoying windfall oil revenues, certainly surprised many Iranian motorists. And that the government that sits on top of some of the world’s largest gas and oil reserves is considering investing in alternative energy may surprise them even more. “Proper management of resources, turning to substitute fuels ... and allocating objective-oriented subsidies in the energy sector are among ways to make optimum use of the country’s energy reserves,” Ahmadinejad told MPs last month. But turning to alternative fuels involves a large financial commitment, and with investments in rudimentary refineries being sluggish, global experts think the talk about alterative energy resources will remain just that. But petrol rationing is a realistic and provides an immediate option for Tehran to reduce domestic hydrocarbon consumption. Whether Iran goes ahead with its fuel rationing, which may well irritate the West, but result in domestic conflicts as well, is for us to wait and watch.

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