Ending Gasoline Subsidies in Iran

abarrelfullabarrelfull wrote on 21 Dec 2010 07:44
Tags: iran prices subsidy

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When oil prices were breaking records on a daily basis back in 2008, one of the talking points was that the only countries enjoying demand growth were those that were subsidising their prices. At those very high prices, consumers in the USA, Europe and Japan, were cutting back.

Countries like India and China figured heavily. Their prices were set by the government and so were being indirrectly subsidised. India has at least freed the price of gasoline since then and plans to do the same for diesel.

Oil producing countries however are the ones where the subsidises are the most significant, and one of the craziest countries in this regard was Iran. It spends more on fuel subsidies than it gains on oil exports.

Strangely enough, the Iranian government has been saved from the unsustainable madness, by none other than the Great Satan himself. Unable to import or produce enough gasoline to meet demand, they have finally bit the bullet.

On Saturday night, though, the Iranian president announced that subsidies would be abruptly slashed. Each of the first 60 liters of gasoline per person will now cost 4000 rials (about $1.50 per gallon), and additional gasoline will go for 7000 rials per liter (about $2.70 per gallon).

Now Iranians will have to pay the real price for their gasoline, and we will see a shift in demand patterns. If the government can survive the backlash, they will have money to spend on more sensible things. Perhaps on increasing production.

From the point of view of the rest of the world, this frees up Iranian crude oil for the rest of us to consume. If only OPEC's other members would follow suit, it would remove a big supply risk that hangs over the market. As long as everyone pays market prices, then demand will automatically change with prices, making the disaster scenarios of the peak oil crowd nothing more than fantasy.

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