Analysis

In Heavily Subsidized Iran, High Fuel Prices Could Spell Disaster for the Regime

Iran is in dire need of economic reform, but the latest squeeze of the middle class is a dangerous bet for Tehran, hoping to repress a massive wave of riots

Iranian Supreme Leader Ayatollah Ali Khamenei meets with a group of school and university students in Tehran, Iran, November 3, 2019
OFFICIAL KHAMENEI WEBSITE/ REU

Raising gasoline and bread prices in Middle Eastern countries is asking for trouble. It's a known fact, and very few leaders have managed to escape its fateful consequences. Only last year, Jordan's King Abdullah II was forced to back down from passing a new tax law, after a dramatic increase in fuel prices sparked angry demonstrations. Being forced to fire his cabinet taught the king the same lesson his father had learned: There are some things you just don’t touch if you want the streets to remain quiet.

Only Egyptian President Abdel-Fattah al-Sissi has until now managed to cancel major fuel subsidies with only a few scars. “Where do you want me to take the money from?” he asked the protesters, and his security forces made sure the public found in them the strength to accept the answer.

Iran has a haloed tradition of political and economic protest. Civil revolt brought down the Shah, but the regime that succeeded him has not been spared. Only in 2009, after Iranians came out in large numbers against alleged election fraud was Mahmoud Ahmadinejad re-elected.

The socialist president, who never wore a tie to express his disgust for the bourgeoisie and the West, engineered a plan for necessary economic reforms. But it was never truly put in place, with Iran coming under draconian economic sanctions.

Although economic pressure dissipated somewhat after Tehran signed the 2015 nuclear agreement, the economy did not have enough time to recover before U.S. President Donald Trump withdrew from the nuclear deal and imposed another dose of severe economic sanctions. The benefits of the agreement never trickled down to the impoverished middle class, and during this entire period, the economic reforms remained mostly theoretical. Some subsidies were reduced, but the Iranian government granted direct aid in cash to needy families instead, so that no real savings accrued to the state coffers.

People protest against increased gas price, on a highway in Tehran, Iran, November 16, 2019
Nazanin Tabatabaee/WANA (West Asia News Agency)

Estimates are that Iran spends $69 billion a year on energy subsidies – about 15 percent of GDP. Of this amount, $26 billion goes on oil, and a similar amount on electricity. Iran seems to be the most subsidized country in the world. With gasoline at about 9 cents per liter, Iranians are encouraged to use their cars, and 80 million Iranian citizens consume 90 million liters of gas a day – 15 million liters less than the country’s entire official production.

But the official figures don’t paint the entire picture. An estimated 10 to 20 million liters are smuggled daily into neighboring countries, which means Iran loses an estimated $3.5 billion annually to gasoline smuggling – a sum equal to its development budget. The paradox is that until last year, Iran imported gasoline from Asia and sold it to consumers at a subsidized price, while it was exporting its own at market prices, primarily to the United Arab Emirates, which is how it managed to finance some of the subsidies. This year however, the government had to freeze its gasoline exports so it could accumulate reserves to help it get through international sanctions.

The inauguration of the new Persian Gulf Star oil refineries in March ostensibly made it unnecessary to continue importing gasoline, so theoretically, the government could have continued the wasteful subsidies. But the scope of the smuggling, the temptation to continue exporting gasoline for as long as possible, and the pressing need to cut government spending led to the decision to raise gasoline prices.

If the government doesn’t back down in the face of the current unrest, car owners will pay 12.7 cents on each of their allocated 60 liters monthly – a dramatic increase of 30 percent over the current price. Above that limited quantity, drivers will pay 26 cents a liter. As usual, the ones who will suffer most from the new reality will be the middle-class, who drive older gas-guzzlers, and who will not be the first to take to the streets.

The demonstrations that broke out after the decision came as no surprise; security forces were deployed in large numbers in major cities even before the order was issued. The question now is how quickly the regime can suppress the demonstrations, and how will it be able to stop them from inflating into wider anti-government protests .

Ali Khamenei has backed the subsidies reform, and the administration has promised that the income will be used to help the needy, but if public order is truly under threat, the Supreme Leader can always blame the government and President Hassan Rohani. For now, he is only blaming “enemies of the revolution” for fanning the protests, and continues to kill citizens in the streets.