Iran: Gasoline and Shock Therapy

EghtesadOnline: Friend and foe have been trying hard to figure out what happened and why in the eight days after the government decided to cut fuel subsidies, sending gasoline prices to levels unseen in Iran ever since oil was discovered more than a century ago.

News ID: ۷۸۵۰۷۸

30 November 2019

In all likelihood more price rises accompanied with protestations are still to come.

With the benefit of hindsight, it must be said that we have come a long way, for better or worse. This can be said of almost everything and everywhere -- countries big and small, rich and poor, developed and underdeveloped.

One thing that has almost always been of paramount interest and importance in our country is the price of oil and by extension that of gasoline and diesel.

Leaving the politics of oil to oilmen and the powers that be, this piece will try to concentrate on the price of gasoline and what it entails for the trust factor between the rulers and the ruled.

When the government raised pump prices last week by 50%, from 10,000 rials to 15,000 rials (for subsidized fuel -- 60 liters/per car/per month) and by 200% for unsubsidized gas, it did not go well with the working class, albeit, that is to say the least.

Now let’s do some gasoline price numbers. Forty years ago in 1979 when the revolution happened one liter of gasoline cost 10 rials. Today it costs 30,000 rials (not including the subsidized 60 liters/per car/per month at 15,000 rials. For taxis, vans and pickups, the formula is different and diesel prices remain unchanged for now).

The chart below speaks for itself.

Bolt From the Blue

When the unprecedented price hikes were announced at midnight on Nov. 14 most of the people were asleep. It came as a bolt from the blue, more so because almost all relevant officials had been saying for more than a year and on record that fuel prices will not rise and nor will there be any rationing!

The government went overboard to say that it was “not raising prices but cutting costly fuel subsidies.” To calm furious public opinion, it rushed to announce that the $2.5 billion annual revenue from the increase in gas prices would “in its entirety, go for public welfare and not a penny for the treasury.”

Senior economic officials said “60 million Iranians will have their bank debit cards loaded with 550,000 rials ($4.5) every month.” This “cost of living allowance” looks like a twin brother of the costly cash subsidy government(s) have been paying to the 70 million “underprivileged” since 2007, and time and again have said they cannot afford it because the money is not there.

And mind you the two payments (cash handouts being paid to the people before and after the rise in gasoline prices) are unrelated. The dilemma and the government’s new financial commitments do not end here and a new paradox emerges.

Why, for instance, economists and social scientists ask, in a rich country of 80 million people, 60 million should have economic problems and be eligible for state handouts, which anyway are like peanuts due to the galloping inflation and sinking value of the rial?

Awaiting Explanation

What the Rouhani administration, knowingly or otherwise, has not mentioned publicly, so far, is according to which economic and social theory or formula it decided on the monthly 60-liter quota for a car.

By the same token, the new price theory of 30,000 rials for a liter of unsubsidized gasoline also remains unclear. Many beg the question why not 20,000 rials, or 40,000 rials, or for the matter 50,000 rials?

Truth be told, the sudden gasoline price hike has given rise to more questions than answers. It resulted in violent protests across the country in which tens of people were killed and hundreds of banks and public places were torched.

Developments were so sudden and shocking that the internet was cut off for one week. This surprising move undermined medical services, private and government businesses, banking sector, startups, income of SMEs, overseas trade/transportation and the work of travel agencies.

The most distressing was the suspension of free messaging services used by tens of millions of people, and also by tens of thousands of rural and urban folks to make a living. Their mobile phone and messenger apps are their only “shop” through which they sell their goods/services and provide for their families under these extraordinarily tough economic times.

News and analysis are aplenty about the loss inflicted by the blocking of the internet during the start and end of the widespread demos (Nov. 16-23) against the fuel price hikes.

A former head of the Iran Chamber of Commerce Mohsen Jalalpour was quoted at the weekend by Persian-language news outlets as saying that the near blackout “cost the country’s economy $1.5 billion”.

The internet mapping company, netblocks.org put the figure at “$369 million a day” or $2.9 billion for the week when Iran’s internet connection with the outside world was cut off.

State, government and telecom officials in Tehran said, understandably, that the unprecedented restrictions were “necessary”.  Some said it “should have happened sooner rather than later.”

There is empirical evidence that raising fuel prices, that too as high as 50% to 200%, means we will be hurtling towards higher prices of almost everything. You name it.

Those who claim otherwise may not be well-versed in how the Iranian economy operates and to what extent livelihoods depend on gasoline and diesel prices.

And lastly to those who insist that gasoline price hikes were unavoidable, I must say they could not be more correct. What really demands attention at the highest echelons, and what indeed is in the interest of the nation, is to grasp that economic shock therapies rarely deliver, and more often than not create significant problems.