After rationing gas, many expected and suggested that Iranian government should allow distributing gas at market price to preempt forming a fuel black market. Instead government has maintained a firm line there will not be any gas at market price in Iran. In justifying this President Ahmadinegad has told the reporters that a higher gas price increases inflation and thus government will not consider this at all.
The incentive behind this policy is not hard to understand. Government has already committed to an unpopular policy by rationing gas; the only defense will be keeping gas prices low. The logic is simple: in order to keep the cake cheap, everyone has to have thinner slices, but the question is if this is the only cake on the market?
For decades many argued that demand for gas is inelastic in Iran. They have argued that as a necessity it must be made available at a cheap price to guarantee the social welfare of the society. In disagreement many economists and energy experts have argued that demand for gas is elastic and many consumers use gas to drive for pleasure and not out of sheer necessity.
The latter have offered evidence such as the price discrepancy of automobiles and the daily average of urban and rural trips to show that demand for fuel is indeed elastic and market approach to it is justified. Because of demand’s elasticity there are consumers who are willing to pay a price higher than nominal price. Of course this willingness is justifiable by the marginal utility gained from these extra liters.
Government decision not to supply any gas at market price has increased the real price of gas to infinity. This has provided many with an ample opportunity to create a black market, through smuggling, using extra ration cards or through individuals and businesses with larger than average allocations.
Iran’s notorious fuel smugglers, who used to smuggle out gas to Iran’s neighbors in Persian Gulf, are smuggling it in from these countries. According to a report by Shargh daily in Bandar Abbas, Iran’s major sea port, gas is found for 6000 Rls per liter or $2.4 per gallon. Fishermen told its reporter that some of the boats sell they gas rations on black market, because first it is less than what they need for a successful trip and second because they make more money this way. After all a secure income stream is preferable to a random one dependent on fishermen’s luck in fishing.
The truth is that markets exist with or without government’s consent. Certainly the motive behind government’s decision is a noble one. However not supplying fuel at market price does not eliminate its free market; it just makes that market a black one. The increased cost of supplying this market increases the market price of gas even more, intensifying the very same inflationary results that government is seeking to avoid.
Supplying fuel at market rate will eliminate the motive to cheat in rationing system and deprives smugglers from their market. It also minimizes the negative externalities of rationing gas. Already airliners are challenged by the increase in the demand for air travels, and hotel owners fear a large drop in the number of their guests, because of sharp decline of road trips. There seems to be no other options.