CAIRO, Egypt, (AP) -Iran’s decision to raise gasoline prices has thrown new light on one of its most entrenched problems — the danger a vulnerable, subsidized economy poses for a country under international pressure over its nuclear program.
Experts warn of the popular backlash that other countries have faced when dealing with the same need to raise long-subsidized staple prices, including in Indonesia which saw a wave of protests in 2005.
At the same time, they doubt the 25 percent price hike imposed last week on Iran’s gasoline will do much, on its own, to solve the country’s underlying economic problems.
Even after Tuesday’s decision to raise gasoline prices from the equivalent of 30 cents a gallon to 38 cents a gallon, Iran has some of the lowest gas prices in the world, and fuel remains cheaper than drinking water. Those prices have led to unnaturally high demand and have saddled the government with fuel subsidies that cost billions of dollars a year.
The demand also forces Iran to import more than half the gasoline it consumes because it lacks enough refinery capacity up — a glaring vulnerability as the U.S. and its allies look for pressure-points in negotiations over Iran’s nuclear program.
“The gasoline import issue is the Achilles heel for Iran,” said Amy Jaffe, an energy expert at Rice University’s U.S.-based James A. Baker III Institute for Public Policy. “It shows the vulnerability of their economy.”
Consistently high oil prices over the past few years have helped the economy grow more than 4 percent annually and left Iran awash in petroleum money, masking the economy’s underlying weakness. But the country lacks the investment it needs to reverse its falling oil production because billions of dollars are spent instead on subsidies for fuel, food, paper, fertilizer, pharmaceuticals and other products.
Outside experts estimate that Iranian energy subsidies alone, including gasoline and natural gas, amount to $30 billion, or 15 percent of the country’s entire economy, and total subsidies are close to twice that figure.
Conservatives in Iran’s parliament, especially those aligned with the country’s national oil company, have long pushed for higher gasoline prices.
There has been sharp criticism of the government for withdrawing billions of dollars to pay for domestic expenditures, like the subsidies, from a fund it set up in 2000 to hedge against a future downturn in oil prices and invest in the energy sector.
“They have so much more revenue than they ever thought they would have,” said Jaffe. “Yet at $70 per barrel, they were taking money out of the oil stabilization fund, not putting it in it. That’s unsustainable.”
Siphoning off this money in the current climate leaves the country vulnerable if oil prices fall and robs the oil sector of productive investment.
Investment from outside Iran is also increasingly rare, as the U.S. pressures foreign oil companies not to do business in Iran.
President Mahmoud Ahmadinejad, who has promised to share Iran’s oil wealth with the nation’s poor, has opposed past attempts to increase gasoline prices and cut demand.
“He doesn’t want to be the man who has to drink this poison,” said Saeed Laylaz, a prominent Iranian analyst.
Ahmadinejad made it clear this time that parliament had forced him to agree to the latest increase, Laylaz noted. The president has also faced increasing domestic political pressure over his defiant stand on the country’s nuclear program.
But Frank Verrastro, an oil analyst with the Center for Strategic and International Studies in Washington, said the international pressure could also give Ahmadinejad cover to enact unpopular measures.
“If as a result of increasing prices, you reduce demand and import reliance, then it makes you less vulnerable,” he said. “It’s unpopular, but if you can sell it as being under siege by foreign threats, you can mask the pain a bit.”
So far, response in Iran has been fairly muted; prices weren’t raised enough to reduce demand, Jaffe said.
Narsi Ghorban, an independent energy consultant based in Tehran, said if planned rationing goes into effect, that could have much more impact. The plan would allow consumers to use “smart cards” to purchase a set amount of gasoline at the current subsidized price, and any additional quantity at a much higher price.
But Laylaz said the ration plan was simply creating a black market in “smart cards,” further enabling those close to the government to enrich themselves at the expense of the poor, in an economy considered full of corruption and cronyism.
“The mismanagement of the economy hurts Iran more than any international sanctions,” he said.