Iran: Why the petrol subsidies had to go

Iran announced a four-fold increase in the price of petrol as of 20 December . Many hope that this finally will bring the end of the Islamic regime. The timing of this announcement is certainly peculiar. The ongoing sanctions against Iran have been the worst since the era of Mossadegh when Iran’s oil exports were effectively blockaded by British forces and her allies.

Today, just as yesterday, Western media spare no effort to demonize Iran or her President, Ahmadinejad. The Israelis tirelessly dance to their own constant war tune, and Wikileaks has revealed that Iran has some work to do with some of her Arab neighbours too, though this latter claim is rather exaggerated by the way the leaks were reported – see point about Western media above.

Economically too, Iran’s growth has decidedly slowed down since last year, and inflation has only just been brought under control. So why risk inflation with such a huge increase in fuel costs? All in all, one would have thought that Ahmadinejad would be treading lightly for now.

Not so! What is behind the move to remove subsidies? No doubt, several factors are involved. However, it is the economic imperative that has nearly everyone convinced. This includes both domestic and foreign friends and foes alike. Here’s a list of the reasons involved:

– Iran’s main source of foreign currency is oil. Selling it at prices way below the market price is not sensible. The price before the cuts was around 9 cents a litre. In Europe, petrol sells for around $1.70 a litre. When oil was much cheaper, it did not matter that so much of it was given away at production level prices. But when the price rose from $20 a barrel for the longest time to peak at $150 by 2008, it became clear that the situation with the subsidies was untenable.

– add to the above price hike, the reality of a population hike too (from 30 million in the 1970s to 75 million today), and the burden on the treasury is apparent.

– This kind of burden has its most negative impact on investment opportunities that are lost due to recurrent (consumption) costs. In order to safeguard the wealth of the nation, a greater portion of oil income should be spent on productive investments with profitable returns rather than on petrol consumption alone. High subsidies compromise a nation’s future development.

– ‘Until recently, a household of four in Iran gets on average about $4,000 a year in various subsidies on oil and natural gas alone’. It should be remembered that this is merely a calculation based on gross figures. In reality, the bulk of this subsidy would go to rich families that consume far more energy than the average family. Blanket subsidies benefit the rich more than the poor. And they foster a culture of dependence.

– Iran has one of the highest per capita consumptions of fuel in the world, and constitutes the tenth largest polluter among all countries. This results in excessive waste and pollution, and renders the country’s industrial production inefficient, expensive and uncompetitive. Moreover, Iran’s ecology suffers from this pollution, and the health of its citizens is at serious risk from the emissions. “The air pollution in Irans’s capital, Tehran, is said to be so dangerous that one Iranian official described it as a ‘collective suicide‘.”

So the case is clear, and has been for the longest time. But why is this being done now?

After all, Iran is in the midst of grappling with the toughest set of UN sanctions against her, and she does not need any more economic or political trouble. Inflation is barely under control, and many are feeling the pinch of sanctions.

The last time petrol prices rose there was rioting. The BBC reported that ‘At least 12 petrol stations have been torched’. ‘“[President] Ahmadinejad should be killed,” chanted angry youths, throwing stones at police.’

So how is it that in the midst of all this theatre, Ahmadinejad has risked this move? Here are some suggestions for the reasons behind this surprising move:

– Ahmadinejad has the confidence and enough backing to attempt such a steep rise in prices. Although it is early days yet, it appears that a long period of public debate since the announcement of the intention to remove the subsidies some years ago has increased public support for the measure.

–  The abuse of power by the West in imposing sanctions on Iran through the UN route has created a political scapegoat for Iran’s leaders. A worsening economic situation is easily blamed on the sanctions.

– Similarly, the sanctions have cut Iran’s imports, and reduced her investments abroad. This in turn has helped improve Iran’s balance of payments. At $100 billion, Iran’s reserve of foreign currencies is said to be at its highest level ever.

– As part of compensating ordinary citizens for the expected price hikes, Ahmadinejad has promised cash transfers to the tune of $20 to $100 a month. This is likely to be translated into political support in return.

Ahmadinejad’s calculation seems to be risky, but at the same time quite clever. If he manages to pull through this first stage of economic restructuring intact, he will be in a much stronger position to confront both his internal and external opposition more strongly.

Unless the economic situation in Iran leads to an implosion, the most likely future scenario is for recent trends to continue in tandem with a change in the global economic order, namely: further weakening of the West and a strengthening of Ian’s bargaining position.


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