Identifier
Created
Classification
Origin
06DUBAI4992
2006-08-02 14:27:00
CONFIDENTIAL
Consulate Dubai
Cable title:  

IRAN TO CONTINUE GASOLINE SUBSIDIES

Tags:  IR PREL PGOV ZP EPET ETRD ZR 
pdf how-to read a cable
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ZNY CCCCC ZZH
R 021427Z AUG 06
FM AMCONSUL DUBAI
TO RUEHC/SECSTATE WASHDC 2845
INFO RUCNIRA/IRAN COLLECTIVE
RHEHAAA/NATIONAL SECURITY COUNCIL WASHINGTON DC
RUEHAD/AMEMBASSY ABU DHABI 1686
RUEHZM/GULF COOPERATION COUNCIL COLLECTIVE
RUEAIIA/CIA WASHDC
RHEFDIA/DIA WASHINGTON DC
RUEHDE/AMCONSUL DUBAI 5837
C O N F I D E N T I A L SECTION 01 OF 02 DUBAI 004992 

SIPDIS

SIPDIS

E.O. 12958: DECL: 8/2/2016
TAGS: IR PREL PGOV ZP EPET ETRD ZR
SUBJECT: IRAN TO CONTINUE GASOLINE SUBSIDIES

REF: A) DUBAI 501, B) DUBAI 399

DUBAI 00004992 001.2 OF 002


CLASSIFIED BY: Jillian L Burns, Acting Consul General, Dubai,
UAE.
REASON: 1.4 (b),(d)


C O N F I D E N T I A L SECTION 01 OF 02 DUBAI 004992

SIPDIS

SIPDIS

E.O. 12958: DECL: 8/2/2016
TAGS: IR PREL PGOV ZP EPET ETRD ZR
SUBJECT: IRAN TO CONTINUE GASOLINE SUBSIDIES

REF: A) DUBAI 501, B) DUBAI 399

DUBAI 00004992 001.2 OF 002


CLASSIFIED BY: Jillian L Burns, Acting Consul General, Dubai,
UAE.
REASON: 1.4 (b),(d)



1.(C) Summary: Public statements by the Iranian oil minister and
Majles Economic Commission (MEC) head this past week suggest
Iran will appropriate money to continue gasoline imports and
subsidies for the second half of the year. The Ahmadinejad
administration and Majles were at odds after the oil minister
announced June 23 that Iran would ration gasoline while holding
prices constant beginning September 23 (when funds for imports
are scheduled to run out). Majles deputies voiced their
opposition to rationing almost immediately, offering two
alternatives. Many favor a two-tier pricing mechanism based
either upon the amount of gas bought or personal means.
Alternatively, a faction led by the MEC head believes neither
rationing nor two-tier pricing are viable until the government
institutes longer-term solutions such as enlarging the public
transportation fleet and converting gasoline engines to natural
gas. For now, this faction has won the policy debate, and a
professor from Tehran says gasoline imports will continue to
avoid risk of agitating the public. End Summary.

Gasoline Imports to Continue
--------------

2.(U) Official statements this past week suggest Iran will
continue gasoline imports during the second half of the Iranian
year (Sept. 23, 2006 - March 22, 2007). On July 24, Majles
Economic Commission (MEC) head Kamal Daneshyar said the
government should submit a four billion dollar bill to the
Majles to continue imports, taking money from the Foreign
Exchange Reserve Fund. Reuters reported July 30 that Oil
Minister Kazem Vaziri-Hameneh agreed importing gasoline "for the
next few months" was necessary, although a final decision would
not occur until the Majles returns from summer recess in two
weeks. The same day, Mehr News Agency, without attribution, said
the Energy Department of the Management and Planning

Organization had begun to draft a three billion dollar law for
the imports, drawing from the Oil Stabilization Fund. Managing
Director of the National Iranian Oil Refining and Distribution
Company Mohammad Reza Nematzadeh said given current prices, Iran
would need around 3.5 billion dollars for the rest of the year,
part of which has already been approved (he did not say how
much). (Comment: It is unclear how the discrepancies over the
amount of funds and which account to draw them out of will be
settled. End Comment.)

3.(U) Continuing gasoline imports reverses two of
Vaziri-Hameneh's previous statements. The Majles budgeted four
billion dollars for imports this Iranian year (March 23,
2006-March 22, 2007),but in April Vaziri-Hameneh announced the
government cut that figure to 2.5 billion, meaning subsidies
would run out halfway through the year on September 22.
Vaziri-Hameneh then said June 23 the government would start
rationing gasoline on September 23 to make up for lost gasoline
supply (reftel B). (Note: On July 31, National Iranian Oil
Company Director for International Affairs Hojjatollah
Ghanimi-Fard said money for imports would run out a month
earlier. All other official statements echoed the September 23
date. End Note).

4.(U) Vaziri-Hameneh's calls for gasoline rationing sparked
opposition from the Majles. Until he agreed to continue imports,
the administration and MPs dueled in the press and in closed
meetings over appropriate gasoline policy. During that debate
three factions emerged, each with their own solutions to what
daily Donya-ye Eqtesad (World Economy) called "presently~one of
the most serious problems faced by the government," and
reformist daily E'temad termed "the most challenging economic
debate for the government."

Three Solutions: Rationing, Dual-Pricing, or Continuing Subsidies
-------------- --------------

5.(U) According to Vaziri-Hameneh, Interior Minister Mostafa
Pourmohammadi, and government spokesman Gholam Hossein Elham,
the administration originally favored rationing gasoline once
government subsidies run out (reftel B). The administration
opposed raising the price of gasoline from the current 9
cents/liter (34 cents/gallon) to avoid triggering further
inflation (already at around 12 percent). The government is also
concerned about sparking popular unrest, which has occurred in
the past after price hikes on essential goods. As to how
rationing would work, subsequent statements by Vaziri-Hameneh

DUBAI 00004992 002.2 OF 002


and news reports suggested motorcycles would receive 1
liter/day, personal cars 2.5-5, cab companies 15
liters/day/vehicle, and private taxis 30 liters/day. Buses and
trucks might receive more. The government would eventually
distribute rations via "smart-cards" (reftels A, B) that deduct
from electronic balances at filling stations. Until then, the
government would use coupons.

6.(U) In contrast, many MPs favor "two-tier" or "dual" pricing
and have suggested two variants. First, prices might differ
depending on the quantity of gasoline purchased. Consumers would
buy their first three liters at a subsidized price, for example,
but afterwards pay market price or on a sliding scale with
prices increasing along with the quantity of fuel. Second,
prices paid could depend on income or other personal financial
variables.

7.(U) Daneshyar leads a faction of MPs who want to continue
subsidies. They call for 26 conditions from "Note 13" -- an
addendum to this year's Budget Law - to be put in place before
the government institutes rationing or two-tier pricing. Note 13
allocated 5 billion dollars to, among other measures, expand the
public transportation fleet, phase out dilapidated cars, make
engines more efficient, and convert engines to run on natural
gas. Daneshyar's faction has apparently won the policy battle
thus far.

8.(C) A chemical and facility engineering professor from Tehran
told Acting CG and PolEconoff August 2 that Iran must continue
gasoline imports or face a crisis because, he implied, the
people would not accept rationing. He said the government is
building compressed natural gas (CNG) stations -- albeit at a
slow pace -- and has converted some cars and buses to CNG. The
government began a program several years ago to buy up old cars
and provide loans for new ones, but most poor people cannot
afford new vehicles. The professor also said some Tehranis send
their old, inefficient cars to other cities -- exporting
pollution.

9.(C) Comment: The Ahmadinejad administration's backtrack on
rationing illustrates two points. First, Iran is unlikely to
wean itself off low gasoline prices in the near future. Prices
are so far below market value that any effort to remove
subsidies would cause enormous fall-out. Iranians feel entitled
to cheap gasoline with their vast oil reserves. Furthermore,
inflation continues to plague the economy, the Ahmadinejad
administration maintains a populist platform, and precedent for
unrest after price hikes exists. As MEC member Iraj Nadimi
opined July 9, "The present government and Majles do not have
the necessary courage for adopting a rationing scheme or a
two-tier pricing scheme."

10.(C) Comment continued: Second, although Ahmadinejad retains
Iran's bully pulpit, his administration again showed its
political inexperience and relative weakness within the
government. Deputy Oil Minister Mohammad Reza Ne'matzadeh
claimed June 28, "the government is definitely planning to
ration gasoline in order to control the increasing consumption."
Vaziri-Hameneh's backtrack July 30, however, indicates the
administration did not clear its plan with the Majles nor fully
consider its economic or popular viability before announcing it
-- a beginner's mistake. In addition to potential unrest,
rationing gasoline without changing prices would probably
produce a black market and even more corruption. The
administration and particularly Vaziri-Hameneh lost internal and
external credibility in this episode, and it provides another
example that Ahmadinejad's administration does not have the
final word within the government about Iran's most important
issues.
BURNS