Iran's Absurd Gasoline Problem

Iran, one of the world's largest oil producers, rations gasoline for its citizens.

This isn't new news. Ahmadinejad imposed the rationing in June 2007. One would rightly ask, however, "why?!"

Here is some data to set the stage:
  • Iran has been subsidizing gasoline since at least 1979.
  • At the time the recent rationing was imposed, gasoline prices were raised 22% to 42 cents per gallon. (note that the rationing and price rise triggered rioting)
  • Last year, Iran spent nearly $7B importing gasoline.
Julian Border from The Guardian puts this situation this way:

(because of the subsidies)... There is consequently huge demand, but limited supply. With that price at the pumps, it has not made economic sense to build refineries, so Iran has managed to become an oil-rich nation with chronic petrol shortages.
Everyone I talk to, including officials, realises that the petrol subsidies make no sense, but no government since the 1979 revolution has had the political courage to cut them.

So if we look at the situation from this limited perspective, we see a nation artificially inflating demand with subsidies, and then going into debt paying for it. (Inflation last year was estimated at 20-30%.) The subsidies have also made it uneconomical to build refineries, so they can't produce their way out of the hole they have dug.

This isn't the whole story, however.

Roger Stern at the International Herald Tribune explains:

Iran has ensnared itself in a petroleum crisis that could drive its oil exports to zero by 2015. While Iran has the third- largest oil reserves in the world, its exports may be shrinking by 10 to 12 percent per year. How can this be happening?

Heavy industry infrastructure must be maintained to remain productive. This is especially so for oil, because each oil well's output declines slightly every year. If new wells are not drilled to offset natural decline, production will fall.

This is what is happening in Iran, which has failed to reinvest in new production. Why?

As mentioned previously, the subsidies for domestic gasoline prices make it very unattractive for foreign or domestic firms to invest in new refineries. But there is another aspect to this situation that is equally compelling. Stern continues...

For the mullahs, the short-run political return on investment in oil production is zero. They are reluctant to wait the 4 to 6 years it takes for a drilling investment to yield revenue. So rather than reinvest to refresh production, the Islamic Republic starves its petroleum sector, diverting oil profits to a vast, inefficient welfare state.

Employment in the loss-making state-supported firms of this welfare state is essential to the regime's political survival. [bold added]

I must admit that when I first heard that Iran rations its gasoline and imports huge amounts of it, I thought that the problem was likely because they couldn't find or maintain the technology to refine it. They may be able to pull the oil out of the ground, but being a strongly anti-western nation, I assumed they were falling drastically behind in technology. Just think of what the West found after the Soviet collapse, and how desolate and backward it really was despite putting on a brave face for 50 years.

The general consensus seems to be that the welfare state is more to blame and the problems are mostly economic and policy errors. But I was happy to see Stern bring up the very point about technology:

Refinery leakage exemplifies all that is wrong with the Iranian petroleum sector. According to the state-run Iran Daily, leaks account for 6 percent of total production, yet go unattended.

This colossal revenue loss persists due to the Soviet-style logic of Iran's state-planned economy. Subsidized energy prices force the state oil firm to sell at a loss to the domestic market. Therefore, while Iran could gain billions by fixing the leaks, the state oil firm would be worse off because the maintenance would generate no new revenue. Thus oil and money simply seep into the ground. [bold added]

Perhaps more than anything else, I see the symbolism of outward technological decline -- such as these decrepit refineries -- as inescapable signs of much deeper and greater rot at the core of a society.

The glaring absurdity of one of the most oil-rich nations on earth being reduced to rationing gasoline leads us inevitably to fundamental examples of political and philosophical failures. The Iranian government is based on Islamic law, but in political practice it's just another form of socialism. Soviet-style managed economy, political oppression, stagnation... it's a story we've all seen before. With very few exceptions, the history of the past 100 years has shown that the extent to which a country denies individual rights and with it, free markets, it hastens its downfall.

Here's hoping that the extreme nature of Iran's belief system leads them to collapse faster than the Soviet's did, and before they build or buy nuclear weapons.

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