Wednesday, June 27, 2007

Rationing Gas in Iran

As an oil producer it is ironic that Iran imports 40% of its annual consumption of car gas. It is highly subsidized and many of authorities believe that an increase in its price will initiate hikes in domestic inflation. Since Iran has vast resources of oil, psychologically it is difficult for ordinary citizens to accept that they should pay a higher price for gas.

To this picture one must add a highly protected domestic vehicle manufacturing industry. For decades this industry continued to manufacture and to assemble cars originally designed in 1960’s and 1970’s. In the absence of competition, enjoying the position of a monopoly, Iran’s domestic industry was not concerned by mileage per gallon of gas (MPG) of its products until recently. Importing more efficient cars was banned for several years and even when permitted customs and other fees increase their prices to a level that is not affordable by average Iranian. Thus the average MPG remains relatively low in Iran.

The demand for driving in Iran has been increasing for several reasons: first substitution factor: in the absence of efficient public transportation many Iranians have to drive to make their appointments. Secondly because of income factor, thousands of fixed wages Iranians use their cars to work as cab drivers in crowded metropoliteans of Iran to make extra money, an ironic way to re-distribute fuel subsidies. The increasing population of Iran’s suburbia also contributes to increase in demand for gas by simply requiring inhabitants to drive more.

So here we are, on one hand demand for driving and thus for gas has been increasing, while the efficiency of vehicles have not been improved. Demographically more and more people relied on cheap fuel to keep their transportation costs low or to create an income. Fuel subsidies keep increasing to an unbearable level.

For a long time Iranian economists have been arguing that government should stop subsidizing car fuel. They argued that such a stop would encourage investments in public transportation and designing more efficient cars. They reasoned that such a step would release government resources much needed for developing infrastructure and development projects. They also reminded authorities that moving toward market price would adjust the real cost of transportation, encourage public transportation projects and reduce the consumption thus eliminating the need to import fuel. Authorities fearful of public dissatisfaction and inflationary consequences turned a deaf ear.

Mindful of consequences of an increase in gas prices, government chose a more familiar path: rationing. President Khatami government initiated the project and planned for smart fuel cards. President Ahmadinegad administration followed the same path. Although cabinet tried to defer rationing fuel and sent mixed signals to the market, Parliament stayed firm and just a few hours ago Iranians learnt that rationing is for real. After all in the absence of a free market and a market price there was little else to do. And this is not the first time that a government tries to overrule market dynamics by using technology.

As of last night every personal car is allocated 100 liters per month, already known to be insufficient in the heat of southern Iran and traffic of Tehran and other metropolitan cities. According to ISNA, Fars News Agency and Entekhab news agencies and websites, in several cities people rushed to gas station to fill up one last time on the cheap gas.

Any observer wonders if rationing fuel would bring home the results expected by policy makers. In the presence of such a high demand for gas, a black market is inevitable, so the actual price that people would pay in the terms of money and opportunity cost would be close to the real one any way. Public might not be dissatisfied by increased inflation, but it will be dissatisfied by rationing. And government had yet to face the challenges caused by its not-so-well-liked policy. One wonders, one indeed wonders.

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