Dec. 31 (Bloomberg) -- Iran’s parliament may vote to scrap energy subsidies after a motion presented by President Mahmoud Ahmadinejad was approved by a majority of lawmakers yesterday, Iran’s Press TV reported.

Domestic fuel and utility prices will rise if an economic reform bill is passed, with some funds redistributed to low- income families, the state-run satellite news channel said, citing Ahmadinejad. A further vote is required.

Iran, holder of the world’s second-largest oil and gas reserves, relies on oil revenue for at least half of the government’s budget. The slide in oil prices -- the biggest annual decline since futures trading began in 1983 -- has prompted the government motion and could lead to social unrest, observers said.

“It shows that they’re running out of dough,” said Dalton Garis, associate professor of economics at The Petroleum Institute of Abu Dhabi in the United Arab Emirates. “It is extremely dangerous for the regime as it may precipitate some grass-roots action that could get out of hand, and the ultimate result might be quite chaotic in the short run.”

International crude prices have dropped 75 percent since reaching a record $147.27 a barrel on July 11, following a slump in demand for fuel as economic growth slows worldwide.

As a member of OPEC, Iran agreed earlier this month to oil production cuts, which will reduce the country’s quota to 3.336 million barrels a day, starting tomorrow. That’s almost 500,000 barrels a day less than the country pumped in November, according to Bloomberg estimates.

Oil Prices Falling

Crude oil for February delivery declined as much as $1.94, or 5 percent, to $37.09 a barrel on the New York Mercantile Exchange and traded at $37.28 at 11:31 a.m. London time.

Ahmadinejad on Nov. 23 waved off speculation of an economic crisis in Iran, saying the country could survive with oil prices as low as $5 a barrel and that it managed with $9 crude in the past.

“That’s ridiculous,” Garis said.

Iran, with a population of at least 70 million, spent 13.6 million rials ($1,380) per person on subsidies last year, mostly for energy, Sarmayeh newspaper reported in August, citing the central bank.

Higher Inflation Rate

Even with its vast oil reserves, the country imports about a third of its daily gasoline needs because domestic refineries are unable to meet demand.

Removing subsidies will boost the price of fuel, stoking inflation, which increased an annual 29.4 percent in late September. The inflation rate was 10.9 percent in the month after Ahmadinejad took office in August 2005.

Iran remains a net importer of natural gas because it hasn’t developed fields or built liquefied natural gas plants to ship the fuel abroad. Royal Dutch Shell Plc, Total SA and Repsol YPF SA have backed away from gas production and export projects in the country as the U.S. and Europe tightened sanctions.

Iran’s crude oil production may fall to 3 million barrels a day by 2015 from 4.02 million barrels a day last year because of aging fields and a lack of foreign investment, which would cease the country’s exports of the fuel, Singapore-based Facts Global Energy said in a Dec. 9 report.

Falling exports have led Indonesia to exit the Organization of Petroleum Exporting Countries, of which Iran is a member, as of tomorrow. Indonesia’s attempt to increase fuel costs in 1998 sparked protests that led to the ouster of President Suharto after almost 32 years in power.

To contact the reporter on this story: Ayesha Daya in Dubai at adaya1@bloomberg.net

Last Updated: December 31, 2008 08:57 EST