Facing a serious budget deficit caused by U.S. sanctions and regime mismanagement, Tehran raised the price of gasoline sharply last week, resulting in widespread protests. Tehran’s decision to risk public backlash indicates that Washington’s economic pressure is forcing the regime to risk its political stability in order to prevent a financial collapse.
Ignited by the issue of gasoline prices, the protests quickly turned to demands for an end to dictatorship, religious rule, and the bankrolling of Hezbollah, Hamas, and Bashar al-Assad. State-run Fars News reported 1,000 arrests in the first two days of protests, while human rights organizations counted at least 106 deaths at the hands of security forces.
The administration of President Hassan Rouhani increased the price of rationed gasoline by 50 percent, while tripling the price for purchases in excess of the rationed amount. It sought to dampen the response to price hikes by announcing them late Thursday night, just before the weekend, which begins on Friday in Iran. The administration also pledged to use all revenue from higher prices to fund direct subsidies to the people.
Tehran heavily subsidizes gasoline, which cost about 13 cents per liter (or 50 cents per gallon) before Thursday’s increase. The primary objective of the price hikes is to reduce consumption. Iran now consumes 97 million liters of gasoline per day, up from 73.4 million in 2016. In 2018, consumption grew at an annual rate of 14.2 percent. Growth is driven by artificially low prices and the illicit trafficking of gasoline to neighboring countries where it commands a higher price.
If consumption continues rising at the current rate, by mid-2020 it will surpass Iran’s daily production of 105 million liters. In response to previous sanctions, Tehran invested heavily in domestic refining capacity, so it is not currently dependent on imports, but this independence is not sustainable if consumption rises much further.
Facing a serious budget deficit, Iran can no longer afford its fuel subsidies. “Without money, we cannot run the affairs of the state,” Rouhani said last week, “Although we have some other incomes, the only revenue that can keep the country going is the oil money.” The IMF estimates Tehran needs to sell its oil at $155 per barrel to balance its budget; the price is currently around $60.
If consumption falls, Tehran could potentially raise revenue by exporting gasoline, albeit in defiance of U.S. sanctions. This may reduce the deficit even if the government keeps its promise to spend its earnings from higher gasoline prices on direct subsidies to the people. A shift to direct subsidies makes political sense for Rouhani, with parliamentary elections scheduled for 2020. The direct subsidies can help his allies gain the support of less affluent sections of society, especially in smaller cities and rural areas. There is a risk, however, as rising gas prices will spur additional inflation, which is already at 42 percent.
Despite the price hikes, Iranian gasoline remains comparatively cheap, so fuel traffickers still have a strong incentive to continue their illicit exports. As the dominant player in Iran’s underground economy, the Islamic Revolutionary Guard Corps (IRGC) may benefit if narrower profit margins drive out of business smaller competitors with less political influence.
The price hike and subsequent protests are a testament to the effectiveness of Washington’s maximum pressure campaign. Accordingly, the U.S. should double down on its pressure, especially with tougher enforcement of sanctions already on the books, like those on petrochemicals. Finally, Washington should combine maximum pressure with maximum support for the people of Iran. The U.S. should help restore their access to the internet and impose sanctions on human rights violators.
Saeed Ghasseminejad is a senior Iran and financial economics advisor at the Foundation for Defense of Democracies (FDD), where he also contributes to FDD’s Center on Economic and Financial Power (CEFP). Follow Saeed on Twitter @SGhasseminejad. Follow FDD on Twitter @FDD and @FDD_CEFP. FDD is a Washington, DC-based, nonpartisan research institute focusing on national security and foreign policy.