Iran: Dual Pricing Can Help Boost Export, Combat Fuel Smuggling

EghtesadOnline: Reviving the gasoline rationing system with two rates can help curtail rampant smuggling and help boost exports, a board member of the Iranian Oil, Gas and Petrochemical Products Exporters’ Association said.

News ID: ۷۴۸۶۸۳

12 October 2019

“For the first time in its history, the National Iranian Oil Company has started selling 40 million liters of gasoline per week on average to foreign markets via the Iran Energy Exchange. If and when tariffs rise, consumption is expected to reduce. Fuel surplus will rise and exports can be boosted,” Hamid Hosseini was quoted as saying by ILNA.

The yawning gap between gasoline prices in Iran (7 cents) and neighboring countries at around 100 cents has turned fuel smuggling into a lucrative business and experts believe that selling gasoline at home at higher prices can and will address the chronic problem.

Fuel consumption in Iran amounts to 90 million liters per day, of which reportedly 10 to 20 million liters are smuggled to neighboring states, Financial Tribune reported.

According to the official, annual subsidy allocated to gasoline is $20 billion and experts believe the massive subsidy has created the price gap. So scrapping fuel subsidies and raising tariffs should be a priority of the Oil Ministry.

Tunisia, India and Mexico have adopted complete price liberalization for transport fuels. China, Indonesia and Oman have introduced mechanisms to automatically adjust domestic prices to keep them in line with international rates.

According to the International Energy Agency's latest report, in 2018, the gas subsidy bill was $26 billion, fossil-fueled electricity $16.58 billion and oil $26.57 billion. In 2017 the figures stood at 17.89 billion, $14.41 billion and $16.34 billion, on natural gas, electricity and oil respectively.

Domestic fuel prices are influenced by global prices, refining and distribution costs, domestic demand, access to resources and government tax and tariffs.

Fuel prices are the highest in developed countries, meaning that there governments make the most profit from taxes on diesel and gasoline. The opposite is true in Iran and other oil-rich countries such as Saudi Arabia and Venezuela, as they not only earn zero revenues from domestic fuel sale, they also spend huge amounts on fuel subsidies.

Financial Burden

In addition to imposing a heavy burden on the treasury, energy subsidies in Iran create many other problems, including air pollution due the lack of decent transport less.

“The logic is pretty simple … those who want to consume more than a fixed limit (90 liters) a month should pay more,” he said, adding that so long as gasoline is sold at two different rates, the inflationary effect will tolerable. He did not elaborate.

Nevertheless, economists namely Farshad Momeni, a faculty member of the Economics Department at Allameh Tabatabai University in Tehran are of the opinion that such policies (higher fuel prices) are a recipe for disaster. It will make life difficult for the people and further hurt their purchasing power.

He claims that low-income groups, in particular fixed-wage earners, will be affected the most if fuel prices go up because energy bills account for 20% of their total wages. This figure is hardly 1% for rich families.

Gasoline rationing started in 2007. At the time motorists could buy 60 liters of subsidized fuel each month with a special card at 7,000 rials (70 cents) per liter (at the time a dollar was worth 10,000 rials).

In related news, Alireza Sadeqabadi, chief executive officer of the National Iranian Oil Refining and Distribution Company, said the company’s gasoline output is at 119 million liters per day, of which 91 ml/d comply with Euro-4 and 5 emission standards in which sulfur levels do not exceed 50 parts-per-million.