Gasoline prices in Iran have risen steadily and significantly in recent years, but at 22 cents per liter, they are still some of the cheapest in the world.
Although Iranians have traditionally adjusted quickly to higher costs without noticeably changing their consumption habits, a new increase will test the patience of a public that has been waiting nearly a year for an economic recovery that President Hassan Rouhani promised when he was elected in June. The new prices, announced by authorities in Tehran and going into effect at midnight, will be 10,000 rials per liter, with a ration of 60 liters at 7,000 rials.
Costs will remain low by global standards, but for citizens here, the skyrocketing price at the pump in relation to the value of their national currency, the rial, is shocking. When Iranians paid 800 rials in 2005, five-digit gasoline prices seemed unfathomable. But the new rate brings prices into that previously uncharted territory.
Bijan Haj Mohammad Reza, the head of Iran’s association of gas station operators, said Tuesday that digital readers at pumps are not equipped to display prices higher than 9,999 rials per liter. The current price is 7,000 rials. (The official exchange rate Wednesday was more than 25,530 rials to the U.S. dollar, and the open rate, at which the vast majority of transactions are conducted, was 33,000 rials to the dollar.)
Tehran’s currency market has responded to the uncertainty with a decline of more than 5 percent in the rial against the U.S. dollar this week in open rate trading.
Iran’s main car manufacturer, Iran Khodro, one of the country’s biggest employers, suspended sales until new fuel prices are announced, as the news would affect the auto giant’s pricing structure.
The increase at filling stations is another in a series of attempts by Rouhani’s administration to reduce subsidies and cut the wasteful spending that was costing the government more than $50 billion annually.
Rouhani’s administration made its biggest changes to the subsidy system this month, halting a cash grant program so authorities could review which Iranians were most in need of financial assistance.
None of the goods and services that the Islamic republic subsidizes, however, is as costly or sensitive as gasoline. Since Iran nationalized its oil industry in 1951, all successive governments have let citizens think that cheap gas was a birthright.
“In the past, we had a saying that to avoid trouble, Iran’s leaders shouldn’t play with people’s access to bread and tea. In modern times, we’ve said the same about gasoline. Raising the price on these products is always risky in Iran,” said Ardeshir Golami, a retired petrochemical engineer.
The population boom that followed Iran’s 1979 revolution, along with a domestic auto industry that made cheap cars available to tens of millions of Iranians, resulted in such a thirst for fuel that for the past two decades, Iran had to import most of its gasoline.
“Underpriced gasoline leads to overconsumption, when those subsidies could be used for more productive and healthier investments,” said Kevan Harris, a Princeton University sociologist who studies Iran’s social welfare system. “It also eats up one of Iran’s main exports for internal consumption.”
Iran’s government has often tinkered with its gasoline pricing structure, but not until recently have authorities planned to remove the subsidies completely, and they now realize that the process will take time.
“The government wants to increase its energy prices slowly. If we raise the price by 20 to 24 percent annually, in five years, the price will be completely liberalized,” Vice President Mohammad Shariatmadari said Monday. He said incremental price increases would lessen the blow of a probable spike in inflation.
That timetable to reduce subsidies is a “good thing, as gradualism allows for corrections and adjustments,” Harris said.
Starting in 2006, a tiered pricing system was introduced that gave car owners an allotment of 60 liters per month at a highly subsidized rate of 1,000 rials, after which they had to buy at the open market rate of 4,000 rials, which was still a controlled rate.
That system remains in place, with current rates of 4,000 rials (12 cents) for the monthly ration and 7,000 rials (22 cents) for the open rate. Three days into the new Iranian month, however, and the reduced-rate supply is still not available to drivers at gas stations across the country.
Despite much grumbling during previous increases, there were few incidences of notable public discontent.
This time around, though, the surge coincides with troubling economic conditions that include steep inflation, a sharply devalued currency and a high unemployment rate, all of which are blamed in large part on the tough economic sanctions imposed on Iran over its controversial nuclear activities.
Although many are concerned about increases in their daily costs, analysts say the long-term importance of bringing gasoline prices more closely in line with those in the rest of the world outweighs any short-term negative effects.
“The gas price hike in itself is likely to cause a short-term backlash, but the bigger worry is the impact on wider inflation, which Rouhani’s economic team has chosen to prioritize,” said Mohammad Ali Shabani, a Tehran-based analyst.
If the projected short-term spike in inflation turns into a longer period of preelection inflation levels, “Rouhani will face a major challenge,” Shabani said.