Identifier
Created
Classification
Origin
07IRANRPODUBAI15
2007-03-27 14:27:00
CONFIDENTIAL
Iran RPO Dubai
Cable title:  

GASOLINE SUBSIDIES: IS IRAN FEELING THE HEAT?

Tags:  ECON ENRG EPET PGOV IR 
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INFO RUCNIRA/IRAN COLLECTIVE
RUEHDIR/IRAN RPO DUBAI PRIORITY 0070
RHEFDIA/DIA WASHINGTON DC
RUEAIIA/CIA WASHDC
RHEHAAA/NSC WASHINGTON DC
RUEHDE/AMCONSUL DUBAI PRIORITY 0072
RUEHAD/USDAO ABU DHABI TC
RUEHAD/AMEMBASSY ABU DHABI PRIORITY 0043
RUEATRS/DEPT OF TREASURY WASHINGTON DC
C O N F I D E N T I A L SECTION 01 OF 02 IRAN RPO DUBAI 000015 

SIPDIS

SIPDIS

STATE FOR NEA/IR, LONDON FOR GAYLE, BAKU FOR HAUGEN, BERLIN FOR
PAETZOLD

E.O. 12958: DECL: 3/27/2017
TAGS: ECON ENRG EPET PGOV IR
SUBJECT: GASOLINE SUBSIDIES: IS IRAN FEELING THE HEAT?

RPO DUBAI 00000015 001.2 OF 002


CLASSIFIED BY: Jillian Burns, Director, Iran Regional Presence
Office - Dubai, Department of State.
REASON: 1.4 (d)
C O N F I D E N T I A L SECTION 01 OF 02 IRAN RPO DUBAI 000015

SIPDIS

SIPDIS

STATE FOR NEA/IR, LONDON FOR GAYLE, BAKU FOR HAUGEN, BERLIN FOR
PAETZOLD

E.O. 12958: DECL: 3/27/2017
TAGS: ECON ENRG EPET PGOV IR
SUBJECT: GASOLINE SUBSIDIES: IS IRAN FEELING THE HEAT?

RPO DUBAI 00000015 001.2 OF 002


CLASSIFIED BY: Jillian Burns, Director, Iran Regional Presence
Office - Dubai, Department of State.
REASON: 1.4 (d)

1.(C) Summary: Despite the unpopularity of cutting subsidies at
a time of high inflation, the parliament has set May 22 as the
date to raise gasoline prices by 25 percent. Parliament also
put an annual cap on gasoline subsidies of USD 2.5 billion.
Judging from Iranian press, general Iranian opinion toward the
measure appears generally negative, with some economists
forecasting "massive shockwaves" and others simply predicting
increased corruption in the energy sector. Some details of the
plan are still unclear. Contacts reported that there has been
limited distribution of "smart cards" - although wide-scale
rationing through fuel cards does not seem to be on the table at
this time. It will be interesting to gauge public reaction when
the increase takes effect. Reducing gasoline subsidies is a
positive step for Iran's macro-economic health, but it appears
to fly in the face of President Ahmadi-Nejad's populist promises
of redistributing oil wealth. It also comes at a time when Iran
is likely looking to shore up domestic support for its nuclear
policies in the face of international pressure through UNSC
resolutions. However, the Iranian government may be moving now
to address a structural weakness in its economy and reduce its
dependence on other countries in order to lessen the impact of
any future gasoline embargo on the country. End Summary.

2.(C) Fixed pump prices for the last three years boosted Iranian
gasoline consumption well beyond domestic refining capabilities
- forcing the government to import 40 percent of its gasoline
needs. Environmentalists bemoan the impact of this high
consumption, including leaded gasoline, while Iranian
parliamentarians bemoan the impact that subsidies have on the
federal budget. The Majles threatened to implement a fuel
coupon system and/or to decrease gasoline subsidies last year,

but until recently appeared reluctant to touch gasoline, as
inexpensive fuel is widely viewed as an entitlement in the
world's fourth oil producer. However, in early March, in a time
of heightened discontent with the economy and in direct
contradiction to Ahmadi-Nejad's promised populist spending, the
Majles passed legislation limiting Iranian gas subsidies and
raising fuel costs at the pump.

Growing pressure
--------------

3.(C) Riding high on popular support for his campaign promises
to bring the country's oil wealth to the people's tables,
President Ahmadi-Nejad ignored former President Khatami's
counsel to him to invest in industry, particularly energy sector
infrastructure. He also failed to react seriously to a June
2006 letter by 50 economists on the worrisome state of Iran's
economy. His policy of placating the people with populist
spending appeared to falter when some of his unfulfilled
promises started eroding his popularity. At the same time, his
overspending sparked criticism from academics and elites, in the
run-up to the December 2006 municipal elections. Since
December, public debate on Ahmadi-Nejad's economic mismanagement
has dominated news sources and the minds of many Iranians.
(Note: An overview of the state of the Iranian economy to be
reported septel. Endnote.)

Hard decision by the Majles
--------------

4.(C) In this time of public discontent with the state of the
economy, the Majles passed a very unpopular two-part bill: 1)
placing a USD 2.5 billion annual cap on gasoline subsidies; and
2) increasing gasoline prices, which are set by the government,
from roughly 8 cents to 11 cents a liter. The changes are to go
into effect May 22. (Note: The Majles has postponed action on
this unpopular issue before, it could do so again. Endnote)
There is discussion of further price increases after subsidies
are used up, but no clarity as to how much. In addition to
curbing fuel subsidies, the Majles has also discussed rationing
. In the run-up to the Majles decision to curb subsidies, the
idea of utilizing "smart" fuel ration cards, possibly with a
two-tiered pricing schedule, was debated by decision makers and
in the media. Some contacts reported in January that the
government was beginning to hand out ration cards, although it
does not appear that legislation regarding ration cards has been
passed. The current thinking on utilizing such cards in
conjunction with the subsidies is unknown.

RPO DUBAI 00000015 002.2 OF 002



New bill: insufficient or overly ambitious?
--------------

5.(C) Public reaction to subsidy caps and price increases,
albeit consistently pessimistic, runs the spectrum from
believing the measures to be insufficient to perceiving them as
overly ambitious. According to a March 8 Financial Times
article, Majles deputy Mahmoud Abtahi warned that a 25 percent
hike in pump prices would cause a "severe shock because petrol
is the life blood of the economy." Abtahi urged parliament to
help off-set the financial hit to low-income groups. The same
article cited Iran Economics editor Heydar Pourian as saying
that a 25 percent price increase was "psychologically bearable
and not much above inflation." Business newspaper Sarmayeh
carried an editorial March 8 indicating that the subsidy cap was
a good first step, but not enough. It argued that the problem
facing Iran is two-fold, low-prices and high consumption, and
that the bill only addresses the former. An economist contact
predicted to IRPOff that any increase in gas prices,
particularly any form of rationing or two-tier pricing, will
result in greater corruption in the energy sector, similar to
"the last time the government tried rationing." (Note: A
rationing system used during the Iran-Iraq war was reportedly
heavily exploited by those with close government ties. Endnote)


6.(C) Comment: The Majles is finally taking difficult steps
that will provide long-term economic benefits to combat Iranian
economic mismanagement and end the substantial drain on foreign
reserves caused by the gasoline subsidy. This is a positive
step in economic terms, whatever the motivation. The driving
factor for taking such an unpopular measure at this sensitive
time, however, may be to insulate the country from a possible US
or UN gasoline boycott for Iran, given that the idea has already
circulated in the media and in the US Congress. Iran can reduce
its vulnerability to such a future step by reducing gasoline
imports now, while at the same time reducing Iran's dependence
on foreign countries, long a foreign policy priority. As part
of this policy, it is also planning to bring new refineries
on-line, but of course, this is a longer-term solution. As long
as US policy remains to try to target the impact of sanctions on
the Iranian government and not the Iranian people, a gasoline
boycott is probably not a good option. While it would have a
significant impact on Iran, it is difficult to gauge its impact
on popular opinion and may have the reverse impact as the one we
desire. Although it is difficult to generalize, a rise in
gasoline prices by the Iranian government could increase its
unpopularity in the minds of the Iranian people; a rise in
gasoline prices triggered by a foreign-imposed boycott could
boost solidarity with the government. IRPO will continue to
monitor both public reaction to and implementation of the new
gasoline policy.
BURNS