December 2, 2019


Will Iran's 50% gas price hike pay off for the economy? (Bijan Khajehpour,  December 1, 2019, Al Monitor)

There were three key economic drivers to change the fuel pricing system in Iran: to contain smuggling, reduce energy consumption and improve the government's financial position.

As the introduction of fuel cards a year ago indicated, the government was concerned about fuel being smuggled into neighboring countries, which also facilitates money laundering. There are diverse data on the quantity of smuggled fuel, but based on an average estimate of 20 million liters of gas and diesel being smuggled out daily, and benchmarking the old gas price against the new higher one of 30,000 rials, the annual damage to the Iranian economy would have been about $1.3 billion. On top of that, in most cases, revenues generated through smuggling return to the country in the form of imported goods, hence functioning as money laundering for perpetrators. Such smuggling also imposes a heavy burden on local industries and employment in the country. 

As for energy consumption, the debates that took place in advance of the 2010 law on removing subsidies produced one key conclusion: The only path to containing consumption in the transportation sector would be through fuel prices. Later studies showed that in the Iranian year 1390 (which started March 21, 2011), fuel consumption in the transportation sector declined by 9.2% compared with 1388, the last year in which old subsidized prices prevailed through the whole year.

Obviously, the relationship between fuel consumption and price isn't linear; there are many other factors involved including the availability of public transportation, fuel efficiency and the increased use of vehicles fueled by compressed natural gas. Nonetheless, there is a degree of price sensitivity and the government hopes the higher prices will reduce consumption. According to Oil Minister Bijan Zanganeh, the country has recorded a 20 million liter decline in daily consumption of gasoline since the price hikes.

One of the main objectives of the latest reforms is to improve the government's overall financial position by reducing the cost of subsidizing people's fuel purchases. According to Vice President Mohammad Nobakht, who heads the government's Management and Planning Organization, the fuel price hikes will annually inject an additional 300 trillion rials ($2.6 billion at the free market exchange rate) into state coffers, which officials said would then be allocated to citizens in the form of cash handouts. At the same time, the government has revamped the handout system to increase payments to the poorer social classes and discontinue those for richer families. Some 60 million citizens (about 73% of the population) will receive the new higher monthly payment, which has been adjusted based on the number of family members.

Even if the government allocates all of the new resources to cash handouts, it will still benefit from the expected decline in smuggling and, more importantly, the opportunity to export fuel to neighboring markets. In fact, officials in the Ministry of Petroleum expect the country to be able to generate $5.5 billion in annual revenues from exporting the surplus fuel that will be freed as a result of reduced consumption and reduced smuggling activity. This would compensate for some of the loss of crude oil exports as a result of US sanctions.  

Posted by at December 2, 2019 12:00 AM