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Iran’s decision to raise gas prices exposes economic vulnerability

CAIRO, Egypt (The Associated Press) – 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.

Experts warn of the popular backlash that other countries have faced when dealing with the same need to raise long-subsidized staple prices. At the same time, they doubt the 25 percent price hike imposed this week on Iran’s gasoline will do very much, on its own, to solve the country’s underlying economic problems.

Even after Tuesday’s decision to raise gasoline prices from 800 rials per liter to 1,000 rials per liter (0.059 euros/liter to 0.074 euros/liter, 30 cents/gallon to 38 U.S. cents/gallon), Iran has some of the lowest gas prices in the world. Those rock-bottom prices have led to unnaturally high demand and have saddled the government with fuel subsidies that cost billions of dollars a year.

The demand also forces Iran to import more than 50 percent of the gasoline it consumes because it lacks the refinery capacity to keep up — a glaring vulnerability as the U.S. and its allies look for ways to pressure Tehran to give up its nuclear program.

"The gasoline import issue is the Achilles heel for Iran," said Amy Jaffe, an energy expert at Rice University’s U.S.-based James A. Baker III Institute for Public Policy. "It shows the vulnerability of their economy."

The threat of additional international actions against Iran increased Wednesday when the U.N.’s nuclear watchdog agency said Iran was expanding its uranium enrichment program in defiance of international calls for a suspension.

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.

"He doesn’t want to be the man who has to drink this poison," said prominent Iranian analyst Saeed Laylaz.

Ahmadinejad made it clear this time that parliament had forced him to agree to the latest price hike, Laylaz noted. The president has also faced increasing domestic political pressure over his defiant stand on the country’s nuclear program.

But Frank Verrastro, an oil analyst with the Center for Strategic and International Studies in Washington, said the international pressure could also give Ahmadinejad cover to enact unpopular measures that could strengthen his ability to defend the nuclear program.

"If as a result of increasing prices, you reduce demand and import reliance, then it makes you less vulnerable," he said. "It’s unpopular, but if you can sell it as being under siege by foreign threats, you can mask the pain a bit."

Yet popular backlash from increasing gasoline prices can be fierce, as in Indonesia, which was hit with a wave of protests when it hiked prices in 2005.

So far, response in Iran has been fairly muted, possibly because gasoline is still cheaper than drinking water. Prices weren’t raised enough to reduce demand, Jaffe said.

"The increase is politically significant, but 25 percent is not enough," she said. "They need to raise it a whole hell of a lot more."

Narsi Ghorban, an independent energy consultant based in Tehran, said that if planned rationing goes into effect, that could have much more impact. The plan would allow consumers to use "smart cards" to purchase a set amount of gasoline at the current subsidized price, and any additional quantity at a much higher price.

But Laylaz said the ration plan was simply creating a black market in "smart cards," further enabling those close to the government to enrich themselves at the expense of the poor, in an economy considered full of corruption and cronyism.

"The mismanagement of the economy hurts Iran more than any international sanctions," he said.