On the evening of June 26th, the government of Iran suddenly announced that the long-awaited gasoline rationing (and the complementary price increase from about 9 to11 cents per liter) will go into effect in three hours. The sudden announcement created a mad rush for non-rationed and still cheaper gasoline. It also led to sporadic violence, the burning of several gas stations, and reportedly the death of three people. In the morning after, before a gag rule was apparently instituted by the government, all major Iranian newspapers reported on the chaos, with cover story pictures, and the gas station burnings were widely reported outside of Iran.
Proponents of economic sanctions against Iran immediately seized on the events as either a sign of sanctions working or a clue about Iran’s vulnerabilities that can be seized upon in order to pressure Iran further over its nuclear program. Both of these prognoses are off the mark because, as is usually the case with most of the analyses of Iran, the context of decisions or events are either ignored or, more likely, simply not known. So here are a few points that should be taken into account before any judgment is made about the impact of gasoline rationing on the future of the Islamic Republic:
1. No matter what one thinks of the government/regime of Iran, the need to bring under control energy subsidies and the runaway consumption associated with subsidized prices (a malady of most oil producing countries but particularly bad in Iran where population is large and the price is the second lowest in the Middle East after Libya) is something that has been discussed in the post-revolutionary era for years (as early as 1994) and has been the number one "advice" given to the Iranian government by various international agencies such as the International Monetary Fund. In other words, with or without sanctions or threat of sanctions this has been a "burning" issue for years. The need to confront it was in fact an integral part of post-revolutionary Iran's Fourth Five-Year Plan (2005-2009) approved by the administration of the previous president Mohammad Khatami.
2. Various Iranian governments have been hesitant to deal with the issue because of the fear of social and economic consequences. And this fear is not a post-revolutionary phenomenon. Some of us are old enough, even if barely, to remember the decision by the administration of Hassan-Ali Mansour, a prime minister during Shah’s rule, to raise gasoline prices in 1964 - a decision that was reversed after protests and strikes by taxi drivers. Khatami's government made a half-hearted attempt to deal with the issue by coming up with a somewhat reasonable and politically feasible schedule of gradual but moderate price increases on a yearly basis. The price was gradually raised to 80 toumans per liter (or about 36 cents per gallon which in today’s prices is about one-sixth of the cost of imported gasoline) but three years ago the newly elected conservative parliament (Majles), in a fit of gratuitous populism and against the directives of the Fourth Plan, prevented the scheduled 25 percent price increase at the outset of the Iranian New Year (March 21st). It froze the price, calling the move, in the words of the powerful conservative deputy, Ahmad Tavakoli, "a New Year's gift to the Iranian people." The gradual price increases would not have solved Iran's subsidy or gasoline problems but would have lessened them.
3. The wrong-headed policies of the Seventh Majles became obvious rather soon and both the Majles and Ahmadinejad, who was elected after the conservative-controlled Majles’ decision and had nothing to do with the price freeze, have been trying to deal with the problem of higher chunks of the yearly budget devoted to subsidizing the Iranian population’s need or appetite for the gasoline. Last year, Ahmadinejad's government was almost refused his supplementary budget precisely because of his requested funds for imports and was also severely criticized for dipping into the Oil Stabilization Fund (a fund created by Khatami’s government from oil money set aside for investment or for periods of low oil prices) in order to pay for current expenses. Several options were contemplated throughout last summer (from rationing to a number of alternative price hikes or having a two-tiered pricing system) and the "smart card" system, consisting of cards with information about every car and motorcycle owner and their ration readable at every pump in the country, was supposed to come online as early as last fall. Obviously Ahmadinejad’s populist government, which had promised to bring the “oil money to people’s dinner tables” was not ready to deal with the consequences and the confrontation between his administration and the Majles, which by now had finally mandated a rationing system, over the implementation of rationing became so intense that the Majles speaker, Gholam-Ali Haddad-Adel, wrote a letter to the supreme leader Ali Khamenei in early June (as though the supreme leader does not interfere in the daily decisions of the government enough!) and requested his advice. His advice? Ration but give the government enough room to set its own pace of implementation! In a week Ahmadinejad decided to take a deep breath and jump.
4. So the issue in Iran has not been whether something needs to be done because of Security Council sanctions or increasing economic squeeze of Western countries but how to develop the political nerve to do something that needs to be done in order to have a healthy economy and manageable budget; how to pull off a relatively orderly implementation; and how to confront the consequences. Indeed, last week when Kamal Daneshyar, the head of Majles' Energy Committee, was told of the possibility of legislation in the US congress banning gasoline exports to Iran, he said gladly: "I hope they do it for us and legislate what we cannot legislate ourselves!" If one takes Daneshyar’s comments seriously, one may deduce that threat of gasoline sanctions (or any other sanctions) is pushing the government of Iran become more “responsible,” more intent on cutting economy-breaking imports and subsidies, and more intent on counteracting, rather than giving in to, the “levers of pressure” external players may have over Iran regarding its nuclear program.
5. This is perhaps why none of the significant political players in Iran and newspaper editorials (including reformist Etemad-e Melli, Ham-mihan, and Shargh) are questioning the effort to do something about the problem (although some would have definitely preferred price increases over rationing, complemented with targeted - even direct cash subsidies - for the poor). What is criticized is the hurried implementation, lack of knowledge on the part of NAJA (acronym for the Security Forces of the Islamic Republic which unlike what the name implies is essentially the police force) about the timing of rationing and so on as yet another example of Ahmadinejad government's incompetence. Despite the gag rule on reporting about the disturbances, there is also continued discussion about what the next step should be after the initial shock, with reformist and centrist newspapers pushing for adjustments and complementary price increases.
6. Indeed much is yet to be determined and there is no doubt that there will be adjustments (including critical price adjustments) if indeed the plan can withstand the public reaction. But one hopes that the smart card system of rationing will have at least one benefit: determining exactly what Iran's level of consumption is! The figures usually talked about are not really consumption figures; they are domestic production plus imports figures and hidden within them are a significant amount of smuggling to neighboring countries because of higher prices next door (the price of one gallon of gas in Turkey, for instance, is $4.85 per gallon). If the editorial in Thursday's Kayhan is to be taken seriously (and I am skeptical about the figure since this conservative paper is known for making up facts), gasoline consumption in Iran had risen to an astounding 85 million liters a day. This is a 13-15 million liter increase from last summer figures of about 70 to 72 million per day and this 20 percent increase undoubtedly suggests not only a rise in consumption but also smuggling. The rationing system will not take care of the black market, and will in fact enhance it at the level of individual entrepreneurs, but will bring down the numbers within which smuggling can occur. Ahmadinejad is already claiming that the numbers have gone down from 80 to 70 million a day in a few days and the plan is to bring it down to 60 million liters per day in a short period). Whether this will happen or whether the rationing will take care of the reported organized smuggling done by various government institutions is of course yet to be seen.
7. We also have to wait and see whether the attempted adjustments on the supply side will bear fruit. Iran has been planning for extra refining capacity (by adding to the capacity of the already existing 9 crude oil refineries) for a couple of years. Work on refineries in Arak and Bandar Abbas are well under way with the help of CNPC, China's biggest oil company, and PetroChina. These projects are not in need of international financing and are hence not subject to external economic pressures. According to Fereidun Fesharaki, a Honolulu-based energy consultant and a close observer of the Iranian energy market, the lack synchrony between supply and demand should be resolved by 2010 or 2011. If anything, Fesharaki believes that Iran has been “over-investing” in increasing its refinery capacity not for economic reasons but in order to counteract precisely the kind of economic pressures it is being threatened with.
8. Before domestic supply meets demand, however, Ahmadinejad and his hard-line allies in the parliament may indeed have to pay for rationing and hike in gasoline price politically unless they can figure out a way to contain inflationary pressures and the social distress associated with the reduction of government subsidies. But, if they pay, they will do so within the context of the country’s competitive elite system and electoral politics. After much debate and controversy, parliamentary elections are set for March 2008 and despite expected disqualification of reformist and even centrist candidates, all significant political factions/parties are taking the elections very seriously and are planning to field a sufficiently large and diverse slate of candidates to counteract the possibility of widespread disqualifications. By taking a step that was delayed or feared for so many years less than 9 months before crucial elections, Iran has yet again entered another year of interesting politics. Stay tuned!