Financial Times reported yesterday that Chinese state oil companies began supplying gasoline to Iran this month and now provide the Islamic Republic between 30,000 to 40,000 barrels a day, or as much as a third of the country’s imports. This is despite US attempts to” shut off the supply of fuel on which its economy depends.”
But why would Iran, with 10.20% of the worlds proven oi reserves (leaving it ranked third), need to import gasoline?
The answer, is failed economic policies in the form of subsides.
In 2006, gasoline subsidies accounted for between twenty-five and twenty-eight percent of the government’s total budget at a cost of over $80 billion in the energy sector alone. This left Iran the highest payer of energy subsidies in the region.
Subsidizing below market prices, whether for gasoline, water, bread or any other product, results in shortages as it removes the consumer’s incentive from limiting his or her consumption. As consumers purchase more than they otherwise would under a free market (since the product is cheaper), waste ensues and shortages result. Waste in Iran, in this case, is typified most by inefficiency.
A Deutsche Bank report, for instance, estimates that Iran’s seven million vehicles consume about the same amount of gasoline as Britain’s thirty-five million vehicles. Given the artificially cheap price of gasoline, Iranians have lost the incentive to purchase more efficient cars or limit their gasoline consumption. Shortages, caused by increased demand and subsequent waste, are especially visible if supply is not increased to meet new demands, as is generally the case when subsidies occur. This is the case in Iran for reasons of its own.
The government mandated price of approximately $0.09 a liter (nearly a fifth of its market value), the lowest in the Middle East after Libya, has made Iranians among the world’s largest consumers of gasoline. Iran’s twelve percent growth in gasoline consumption, as well as limited refining capacity (due to foreign isolation), has forced Iran to import roughly one third of its gasoline at a higher price while continuing to sell it at a low, subsided one.
These imports have cost the state, and by default its citizens, an estimated $5 billion annually. While at the pump it appears that the subsidies have reduced gasoline prices for the consumers, the hidden costs, in terms of both taxes and inflation, far outweigh the benefits leaving gasoline more expensive than initially apparent.
But even with its imports, demand has not been met. In June 2007, the Iranian government decided to limit gasoline consumption. Its citizens were consuming nearly 75 million liters of gasoline daily, while its refineries were only producing 44 million liters of gasoline per day for domestic consumption. Instead of eliminating the subsidies, which would reduce gasoline demand by thirteen percent, according to the International Energy Agency, the government instead attempted to minimize public consumption through a rationing scheme that limited gasoline purchases to one hundred liters per month at an insignificantly higher $0.11 a liter. By March 2008, the government changed its rationing rules and permitted the sale of extra, higher-priced gasoline at $0.44. This has done little to fix the core problem. Iranians are clever and found ways to bypass the law—for instance purchasing two license plates.
One consequence of Iranian gasoline subsidies, in addition to domestic shortages and unsustainable costs, has been an emerging black market. The cheaper gasoline, approximately one-tenth the price of its neighbor’s, encourages its smuggling into neighboring countries, particularly Afghanistan, Pakistan, Turkey and Iraqi Kurdistan. According to some estimates, between 3.5 and 4.5 million liters of gasoline and nearly two million liters of diesel fuel are smuggled daily out of Iran worth approximately $1.5 billion annually.
The Iranian government will likely point to the US as the reason Iran needs to import foreign gasoline. While this is partially true, Iranian domestic economic policy is the true culprit. American policy will only sustain the problem.