x Abu Dhabi, UAEFriday 21 July 2017

Higher price for fuel and obduracy in Iran

The Iranian people are paying a high price for their government's ambiguity about its nuclear intentions. Iran's leaders have calculated that this posture provides them with leverage and influence. But to what end?

Milton Friedman would be proud. Government subsidies were anathema to the nobel laureate, who extolled the virtues of free markets and their importance to a free society. Mahmoud Ahmadinejad appears to have taken note - at least when it comes to subsidies for petrol. On Sunday, fuel prices jumped by a factor of four, as Tehran embarked on a five-year "economic revolution" that will see subsidies drop across the board.

But what do Friedman and the Iranian president have in common? Nothing at all, in fact.

That is why Mr Ahmadinejad's pronouncements about subsidy reductions reveal so much. Tehran has long had plans for economic reform, but new realities have forced its hand. The opacity of Iran's nuclear programme has brought four rounds of economic sanctions from the UN, as well as a US ban on petrol imports this summer. Already sputtering, Iran's economy is now struggling to keep afloat.

There are sound economic reasons behind dropping the subsidies. "If prices are higher, the energy sector in Iran will become more profitable and hence be able to invest, extract and produce more," said Dominique Guillaume, the IMF's Iran mission chief. Whether Tehran is in any position to capitalise is another question.

Until sanctions are removed, Iran can do little to improve its energy infrastructure no matter what the public is paying at the pump. In particular, sanctions have limited Iran's ability to enhance its refining capacity. The country imports as much as 40 per of the total fuel it consumes.

Mr Ahmadinejad tried to cast the four-fold increase in the price of petrol in a populist light - even as security forces took to the streets to prevent violence. Much of the savings will go to the poor, he said, in the form of direct cheques from the government. But as the cost of transport increases, so will the cost of many staples.

The Iranian people are paying a high price for their government's ambiguity about its nuclear intentions. Iran's leaders have calculated that this posture provides them with leverage and influence. But to what end? Iran's leaders must ask themselves this question as they prepare for talks with the five permanent members of the UN Security Council and Germany next month. The price for their obduracy will only go higher.