Iranian citizens got their first taste of reality last week when the government slashed their fuel subsidies. Ten cent per liter gasoline is a thing of the past and the people are not happy.
Iranian president Mahmoud Ahmadinejad announced in a television interview on Saturday night that cuts would begin at midnight. That gave consumers just a few hours notice and although it had been rumored for months there was complete shock when it happened.
The generic plans had been discussed by the government for many months but there were no real details made available to the public in advance of the announcement. Iranians rushed to fill their tanks on the news and causing long lines to form. There were police cars and antiriot police stationed at each gas station.
The subsidy cuts are part of a five-year plan to save the government an estimated $100 billion a year. Iran is a major exporter of oil and the cheap subsidies had been a benefit of being an oil producing country. As oil prices rose and sanctions against Iran reduced imports of gasoline the cost to the government skyrocketed. By reducing the subsidies it will raise prices and cause price rationing and lower demand.
Iran put a crash program in place to refine gasoline and diesel to get around the sanctions but it has been less than successful. Iran claims it has plenty of gasoline but the raw fuel they are distributing is dirty, full of sulfur and polluting the cities. Thousands of citizens have been admitted to hospitals for lung problems made worse by the low hanging clouds of gasoline exhaust.
There have been riots all over Tehran and newspapers and the media have been warned not to report on the riots or discuss the subsidy problem. A prominent economist, Fariborz Raees Dana, was arrested on Saturday a few hours after he commented about the subsidy cuts to BBC Persia.
Drivers will receive a monthly ration of 60 liters at 40-cents per liter or roughly $1.50 per gallon. This is an increase from the previously subsidized price of 10-cents per liter. This 300% increase in gas prices also comes with a prohibition against raising prices of other goods to offset the gasoline increase. For instance taxi drivers got a 300% increase in fuel costs but they can't go up on their rates. Truckers hauling food can't charge more for their trucking.
Iran is already plagued with rampant inflation of 12% to 25% depending on the goods. Allowing businesses to jack up prices to offset the 300% increase in fuel would only fuel that inflation further. Obviously this "no pass through" plan is doomed to fail because businesses can't operate at a loss and stay in business.
Tehran also announced it would phase out $4 billion in bread subsidies. In their place they will pay each "eligible" citizen about $40 per month in compensation. Those payouts have already begun but you can bet they will shrink as time passes. The Ministry of the Economy has predicted household cooking gas prices will increase 500% and electricity and water by 300%.
Iran has plenty of resources with an estimated $10 trillion in oil alone but the government is keeping the population back in the 20th century. When you oppress your citizens to this extent and make them dependent on government handouts, forward progress is nearly impossible. The high prices for fuel, yes $1.50 per gallon is high for them, is a welcome to reality of the 21st century. It is going to get worse for them before it gets better if Mahmoud Ahmadinejad remains in power and they persist in their nuclear ambitions.
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