Impact of a gasoline embargo on the Iranian economy

At that time, the Iranian government decided to increase the price of “subsidized” gasoline from 800 rials/liter to 1000 rials. Today, the majority of Iranian motorists can buy 120 liters a month at this subsidized price of 1000 rials. The additional demand is supplied at a “free” price of 4000 rials. The gasoline consumption was 60 million liters/day in June 2009. The gas supplied at a subsidized price would then represent around 40 % of the daily consumption. Usually, one considers that Iran imports 40 % of its consumption. An embargo would then decrease the supply of gasoline.

Iran supply and demand of gasoline
Iran daily gasoline consumption (million liters/day) : 60
Iran daily consumption of subsidized gasoline : 21.6
Iran daily consumption of “free” gasoline : 38.4
Iran gasoline supply : 36
Iran gasoline imports : 24

An embargo would then increase the “free” price of oil. The Iranian government which wants to increase the price of rationed gas would have different options :

 Scenario 1 : It does nothing. There will be an increase of the free price of gas, increase of transportation costs, which will lead to an acceleration of general inflation. If the oil prices stay at the present level, the public deficit will stay high (around 10 % of GDP). The lowest incomes will be the most affected by this increased inflation. Then the income inequalities should increase. Real consumption should slow down, which will have some negative impact on growth (the most important driving force on the Iranian economy is the oil price). In the present political environment, such an economic situation would lead to huge social tensions.

 Scenario 2 : It increases the price of rationed gas. This action would lower the fiscal deficit. The “free” price of gas would increase but the increase would be less that in the scenario 1 as gas consumption would decrease due to the higher cost of subsidized gas. Nevertheless, the higher cost of “subsidized” gasoline would create huge social tensions as the lower incomes will be hurt. So, the gasoline embargo would lead to an increase of inflation, but somewhat less important than in scenario 1. Nevertheless, the lowest incomes would also suffer due to the increase of the price of subsidized gasoline. Again, in the present political environment, this economic policy would create social and political tensions.

First, one has also to consider that the discussion about the cost of subsidies is an old discussion in revolutionary Iran. Most of the Iranian economists agree that the government should address this issue, stop to spend so much in subsidies for gasoline. More generally, there is an agreement in Iran that the policy of helping the poor by using subsidies should be replaced by a social policy where financial resources would be transferred directly to the targeted population. The debate concerns rather the way to do it. The Iranian authorities, despite a lot of talk, have done nothing because they feared popular reactions (see for example Khalatbari for a detailed discussion of this issue : http://www.iraninternationalmagazin...). The 2007 decision to ration gasoline was in fact caused by a fear of embargo due to the nuclear issue. In a way, the fear of sanctions pushed the Iranian government to act on this issue, whatever reluctantly. Then, the government proposed to eliminate all energy subsidies in the budget project of 2009/2010 but this proposition was vetoed by the Parliament which was afraid of the social consequences of such a policy (and wary that the government would spend without control the money saved to help the poorest people), (see http://www.zawya.com/Story.cfm/sidv...). All this means that a gasoline embargo might in fact be good news for the Iranian economy as it puts pressure on the government to decrease the subsidies on the price of energy.

Second, in real life, it will be difficult to impose a real embargo from all the countries and it will be even more difficult to avoid illegal imports of gasoline in case of embargo. The Pasdarans and the Bonyads have a long practice of using illegal import networks. A gasoline embargo would also be considered as an aggression by the government and could lead to retaliation. One should not forget that the previous policy of sanctions was used as an argument to give more economic power to the Pasdarans.

Last but not least, as most of the experts of Iranian affairs know, the idea that increasing economic hardship for the Iranian population will lead to a change in Iranian nuclear policy is highly delusional. Ahmadinejad will make a point in resisting to this Western pressure and will again play the card of Iranian nationalism. He will also use this new sanction as an excuse for the dire state of the Iranian economy. And it is a contradiction for western governments to claim, on one hand, their admiration for the struggle of the Iranian population, and, on the other hand, to increase even more their daily difficulties.