Iran Needs $5 Bn Extra Gasoline Subsidy.

Reuters on May 29 quoted the head of Iran's Majlis Energy Commission Kamal Daneshyar as warning President Mahmoud Ahmadi-Nejad he will have to spend an extra $5 bn this year for subsidies on sales to motorists of imported gasoline and diesel to avoid rationing. He said Tehran had to take the money from the Oil Stabilisation Fund, which collects windfall oil revenue for contingencies and investment. This was in addition to the $2.5 bn already allocated in the budget for the Iranian year from March 21, 2006.

Allocation of OSF money for subsidies would fly in the face of Ahmadi-Nejad's promise to maximise spending on capital projects, especially in Iran's regions. Current government spending is already due to rise 20.5% this year, according to Iran Economics, the leading Tehran monthly. With inflation put officially at 13.5%, this would a big increase in real terms.

The fiscal pressure over gasoline imports results from the antiquated state of Iran's refineries and subsidies which keep the price for motorists at 9 US cents/litre. Despite having the world's second-largest proven oil reserves, Iran imports over 40% of its gasoline. The volume of gasoline purchases from abroad has risen to more than 150,000 b/d.

So while high world oil prices boost Iranian coffers and are celebrated by Ahmadi-Nejad, the big rise in imported gasoline prices has become a hot domestic issue. Little progress has been made on a $15-18 bn plan to revamp five existing refineries, build three new ones, and so increase gasoline production over five years from 40m litres/day to 92m litres/d. Daneshyar ruled out an earlier proposal, discussed in government and parliament, for two-tier pricing later in the year to sell imported gasoline at cost to motorists. Even Ahmadi-Nejad's main powerbase, the Islamic Revolutionary Guard Corps (IRGC), has become disillusioned with the new president's performance.

Iran is desperate to avoid UN sanctions over its nuclear programme. Behzad Nabavi, a former industry minister who once headed a state-directed oil firm, Petropars, on May 31 was quoted as saying: "Oil is where Iran is most vulnerable. It's one of the great economic paradoxes".

Even a moderate drop in gasoline imports as a result of sanctions would be a punishing blow for an economy with many soft spots - among others: double-digit inflation, chronic unemployment and cumbersome state controls. One of the possible sanctions discussed at a recent meeting in Vienna of the five permanent UN Security Council (UNSC) members and Germany will be an embargo on supplying Iran with refined petroleum products.

Iran is OPEC's second main producer of crude oil, with output averaging about 4m b/d. Rising crude oil prices - now with WTI hovering around $70/b - pushed ISF to a record $24 bn earlier this year.

Iran is almost fully dependent on trucks to move goods. The number of cars is rising each year as drivers from the baby boom decade after the 1979 Islamic Revolution take the wheel. Locally produced cars are relatively cheap and locally-assembled foreign vehicles are priced lower than in the case of similar cars in the GCC.

Gasoline supplies to Iran come mostly from the Middle East but also from as far away as Venezuela. Closing the import tap could force Iran to either impose rationing - as it did during the 1980-88 war with Iraq - or raise prices and risk a backlash from a public accustomed to paying more for bottled water than for motor fuels. Making up the refinery shortage would take years.

Iran would have no alternative fuel supplies if it is hit by UN sanctions. Dr. Narsi Ghorban, an independent energy consultant based in Tehran, was on May 31 quoted as saying: "Iran really does not have a lot of room to manoeuvre on the basic issue of refinery capacity and [motor fuels]".

Iran suffers from sparse direct foreign investment (FDI) and a creaky telecommunications system. "Iran has a vision of being a regional economic and technological powerhouse. They know very well this vision will not be realised...by domestic companies alone", said Siamak Namazi, managing director of Atieh Bahar Consulting, a Tehran-based firm providing economic surveys and analysis. He added: "High oil prices mean [Iran] is less reliant on outside financing. They have their own money. But that doesn't help the technology gap".

Much of the blame, analysts say, rests at the top. At least 80% of the economy is under the thumb of the theocrats, whose legacy includes unfinished bridges and roads. The official unemployment rate is about 16%, but independent analysts place it above 30%. It is said 25% of Iran's 69m people live below the poverty line. Strategic planning - plotted in Soviet-style, five-year blueprints - is only now starting to warm up to privatisation and foreign investment. Iran, however, has proven to be an unreliable partner in deals with French automaker Renault and Turkish mobile phone network operator Turkcell, for example, with which big plans fell through in recent years because of political, bureaucratic or security intransigence in Tehran.