Iran’s decision to raise gas prices exposes economic vulnerability

Iran’s decision to hike gasoline prices has thrown new light on what could be its most-entrenched problem — a vulnerable, highly subsidized economy, and the political dangers that poses for its populist and hardline president as he faces international pressure over the country’s nuclear program.

Conservatives in Iran’s parliament, especially those aligned with the country’s national oil company, have long pushed for higher gasoline prices with the hope of curtailing demand and freeing up government spending to invest in more oil and gas production.
Consistently high oil prices over the past few years have left Iran awash in petroleum money. But the country lacks the investment it needs to reverse its falling oil production because billions of dollars are spent instead on the gas subsidies. Outside experts estimate that total Iranian energy subsidies, including gasoline and natural gas, amount to US$30 billion (€22 billion), or 15 percent of the country’s entire economy.

Iran faces a double whammy because investment from outside its borders is also hard to get, as the U.S. increasingly pressures foreign oil companies not to do business in Iran.

Despite these dynamics, President Mahmoud Ahmadinejad has opposed past attempts to increase gasoline prices and cut demand because of his promises to share Iran’s oil wealth with the nation’s poor. Iran has a law that says gasoline prices must increase 10 percent every year, but the president has resisted efforts by parliament to reverse a 2005 decision to suspend the annual increases.

International Herald Tribune