Iran Cuts Energy Subsidies as Sanctions Take Toll, Gasoline Prices Soar

Iran started phasing out energy subsidies and replacing them with cash payments to the poor, under a five-year plan promoted by President Mahmoud Ahmadinejad as an “economic revolution.”

Ahmadinejad said the changes would lead to a better distribution of wealth, state-run Press TV reported today. The price supports totaled about $4,000 a year for a family of four, more than the income of many Iranians, and turned the nation into “one of the most wasteful” for energy consumption, the International Monetary Fund has said. The Central Bank put the cost of the energy subsidies alone at $40 billion to $100 billion a year, depending on oil prices.

The three-decade-old subsidies, which allowed Iranians to buy gasoline recently at 38 cents a gallon, are being phased out as pressure mounts from four rounds of United Nations sanctions and measures from the U.S. and the European Union aimed at curbing the country’s nuclear program. The punishments include restrictions on trade related to Iran’s oil and gas industries.

“The government is squeezed as it has never been before and is seeking to cut costs,” Hossein Askari, professor of business and international affairs at the Elliott School of International Affairs at George Washington University in Washington, said in a phone interview before the cuts began.

Under the price supports, an Iranian consumer was permitted to buy a monthly maximum of 60 liters (16 gallons) of gasoline at the subsidized price of 1,000 rials (10 cents) a liter. It will now cost 4,000 rials a liter for 50 liters a month, and 7,000 rials a liter for bigger amounts, Press TV said today. After the five-year phasing out of subsidies, gasoline will sell domestically for 90 percent of the price in the region, according to the legislation.

Wholesale Price

The government also plans to cut subsidies for diesel fuel, kerosene, natural gas and electricity today, Press TV reported. Subsidies as well will be reduced on wheat, rice, cooking oil, milk, sugar, postal services, air travel and rail tickets, according to the plan.

Iran aims to use 80 percent of the money saved to provide cash grants to its poorest citizens and to support energy- intensive industries. About 60 million Iranians have signed up to receive the cash, officials said.

The sanctions have increased the country’s trade costs by about 20 percent, Askari said. The crude output of Iran, the second-largest oil producer in the Organization of Petroleum Exporting Countries, hasn’t risen, while its domestic fuel consumption has, Askari said.

‘Correctly Used’

The main aim of the program “is for consumption to be optimized and for the country’s riches to be correctly used,” Ahmadinejad said in an Oct. 30 television interview.

Iran’s government knows that ending subsidies is necessary for the economy to grow at the pace of “vibrant emerging-market countries,” Dominique Guillaume, IMF mission chief, said on the fund’s website in September.

“They realize that the only way to do so is to restore market pricing of energy.” Guillaume said. “From a domestic perspective, if prices are higher, the energy sector in Iran will become more profitable and hence be able to invest, extract and produce more. Furthermore, if the Iranian people are able to restrain their consumption, this will have a positive side effect on the global oil market.”

U.S. Undersecretary of State William Burns said Dec. 1 that tougher American sanctions over Iran’s nuclear program are costing Iran as much as $60 billion in lost energy investments. The U.S. and its allies allege that Iran’s atomic work may be cover for weapons development, a claim the country denies.

Refining Capacity

Iran had relied on imports for as much as 40 percent of its gasoline because it lacked refining capacity. Iran’s projects in the oil and gas industries have been stalled since the U.S. put pressure on international companies to halt their investments in the country in an effort to isolate it. Iran needs to invest about $46 billion to upgrade its nine refineries and build seven more, officials have said.

Iran’s economy is projected to grow 1.6 percent this year after expanding 1.1 percent in 2009, the IMF said in October.

Two presidents before Ahmadinejad failed in their efforts to revise the subsidy system, which was set up when the country was at war with neighboring Iraq. Such attempts in the 1990s sparked public protests.

Nationwide Demonstrations

Iran was rocked by nationwide demonstrations by protesters who alleged that Ahmadinejad’s June 2009 re-election was fraudulent, a swelling of anti-government sentiment that was put down violently by security forces.

While fear of a crackdown will prevent unrest over the subsidy cuts, Ahmadinejad may face a challenge among members of parliament if they feel the plan isn’t well received by the public, said Scott Lucas, professor of American Studies at the University of Birmingham in England and founder of EA WorldView, a website on U.S. foreign policy and international affairs.

The government projects savings of as much as $20 billion in the first 12 months of the subsidy cuts, down from an initial estimate of $40 billion before the current budget of 3,470 trillion rials was approved in March. The spending plan is based on oil at $65 a barrel. Crude for January delivery climbed 32 cents to settle at $88.02 a barrel on the New York Mercantile Exchange on Dec. 17.

To contact the reporters on this story: Ladane Nasseri in Tehran at lnasseri@bloomberg.net; Caroline Alexander in London at calexander1@bloomberg.net.

To contact the editor responsible for this Peter Hirschberg at phirschberg@bloomberg.net

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