March 22, 2007


All hands to the pump: Oil-rich Iran may have to ration petrol (The Economist, 3/22/07)

In the meantime the shortage represents a vulnerability at an unfortunate moment: Western countries are looking for ways to press Iran over its nuclear programme and there has been some talk of a future embargo on imported petrol.

The subsidy is anyway costing the country dear at a time when the economy has become the focal point of domestic opposition to President Mahmoud Ahmadinejad. A populist spending spree has fuelled inflation and unbalanced the budget. Cheap petrol also encourages enormous waste as well as smuggling to neighbouring countries where it is more expensive. Officials have suggested that raising the price could help reduce consumption by around 20%.

The fear, though, is of a further increase in inflation if prices are brought, as economists say they should be, up to the cost of domestic production, something like 20 cents a litre. There is also a political problem. Iranians often see cheap petrol as proof that the government is redistributing oil wealth back to the people--one of Mr Ahmadinejad's big election promises. Raising the price makes economic sense but is the last thing a populist government wants to do.

Posted by Orrin Judd at March 22, 2007 5:20 PM
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