Iran’s Achilles Heel – or a boon to the Tehran regime? The decision by Vitol, Glencore and Trafigura, the world’s largest oil traders, to stop supplying Iran with petrol ahead of any tightening of US sanctions will test the arguments of those who disagree about the impact of such punitive measures.
Supporters, including US lawmakers, argue that cutting off supplies would bring the country’s economy to its knees. To cope, they say, Tehran would need to reduce subsidies to slash consumption, an unpopular measure that would also stoke inflation.
The imposition of petrol rationing in the summer of 2007 led to public anger, with protesters setting a dozen fuel stations on fire. Some opposition supporters hope the increase in energy prices or further economic pressure from sanctions may encourage poorer people finally to join the anti-regime Green Movement.
“If the regime faced damaging economic pressure from a significant reduction in gasoline supplies ... it might decide that a nuclear bomb, instead of being the guarantor of the regime’s survival, could be the catalyst of its demise,” says Mark Dubowitz, of the Foundation for Defense of Democracies, which supports sanctions.
But others believe the sanctions would at best be largely ineffective and, at worst, help Tehran’s regime as it would be able to appeal to nationalistic feelings. Iran currently imports a third of its petrol needs and claims domestic production would suffice should foreign companies stop selling it petrol.
Critics of sanctions also say Iran would be able to find alternative sources of petrol. Indeed, the International Energy Agency, the western countries’ oil watchdog, has pointed out “new suppliers have readily emerged, notably China”.
“In time, it will be judged as a favour to the Iranian government,” says Fereidun Fesharaki of the Facts Global Energy consultancy and a critic of petrol sanctions.
|* Trading arm of Lukoil|
The government of Mahmoud Ahmadi-Nejad, president, plans to curb consumption by slashing hefty subsidies as of next month. Each car is currently entitled to 80 litres of subsidised petrol per month at 11 cents per litre, with extra petrol sold at about 45 cents. The government hopes to decrease the quota to 60 litres, and possibly to axe subsidised rations.
Cutting the subsidy – even if unpopular – would save Tehran money. Iran last year spent $10bn on petrol imports, money that could be switched to the nuclear programme. Earlier rationing measures have already reduced demand. The IEA estimates that consumption fell last year to 447,000 barrels a day, down 2.2 per cent on 2008.
In addition, Iran is trying to upgrade refineries to boost supplies. Mr Fesharaki believes Iran will be self-sufficient in two or three years. “By 2012-2013, Iran’s gasoline imports are expected to be zero and there will be exports due to the significant additions in refining capacity, as well as upgrading of capacity,” he said in Washington.
However, others question the timetable due to financing constraints.
Perhaps the most important factor cushioning Iran is the fact that policymakers have discussed targeting petrol imports for years, eliminating any surprise. In fact, Iran has already started “gasoline hoarding ahead of US sanctions”, according to the IEA.
Additional reporting by Najmeh Bozorgmehr in Tehran