February 25, 2010

The Effectiveness of Gasoline vs Oil Sanctions on Iran

The deadline for Iran to accept a U.N.-brokered deal on its controversial nuclear program expired on December 31, 2009. Meeintgs are scheduled to discuss imposing new sanctions on the Islamic Republic in the absence of realistic prospects for diplomatic solutions. The failure of sanctions will lead to the undesirable and potentially disastrous option of military action. Even Israel whose very existence is threatened by the Islamic Republic is for now reluctant to use this option. This underscores the significance of the sanctions and their outcome.
Presumably, the harshest sanction that has been proposed is on the Islamic Republic’s refined petroleum imports, mainly gasoline. Dubbed as the “Achilles heel” of the regime, many politicians argue that a sanction on gasoline exports to Iran will paralyze the government. The basis for this argument is the need for the Islamic Republic to import 30 to 40 percent of its domestic consumption of gasoline.
The following is an analysis of the effects of a gasoline sanction versus oil sanction on Iran. It demonstrates why a sanction on Iranian gasoline imports is likely to be counterproductive, harming the Iranian people and actually strengthening the government, whereas a sanction on Iranian oil exports will deal a crippling blow to the government. Ironically, the threat of a gasoline sanction has already provided the means for President Mahmoud Ahmadinejad to get an approval from the parliament on his unpopular plan for the elimination of subsidies that account for over 30% of Iran’s national budget. In five years, these subsidies will be completely removed from the fiscal budget. This year alone the government will save $17 billion which will be allocated to an unnamed government body with no provisions for accountability. This comes even before gasoline sanctions have been decided on or implemented.
In contrast, a sanction on Iranian oil exports -- even without the participation of Russia and China -- coupled with the growing civil unrest inside Iran, will cut deeply into the government’s financial resources and help the Green Movement in Iran bring about the collapse of this menacing government.
Gasoline Sanctions
To better understand the outcomes of a gasoline sanction, we need a quick overview of the current Iranian gasoline market. As of June 2009, Iran consumed 408,385 barrels of gasoline per day (1) of which roughly 128,000 barrels were imported (2). As of September 2009, China exported about 30,000 to 40,000 barrels a day to Iran through third party intermediaries according to Morgan Stanley commodities research, providing Iran with a third of its refined petroleum needs. Vitol (Dutch-Swiss), Reliance (India), Total (France), Royal Shell (UK-Netherlands), Glencore (Switzerland), Trafigura (Switzerland), and Petrona (Malaysia) are the other major players in the Iranian market (3). On January 11, 2010, Reuters reported that Glencore has ceased its fuel sales to Iran. All the others continue to supply Iran with gasoline. Other foreign companies use third party ports such as those in Jebel Ali and Fujairah in the UAE to ship gasoline products to Iran (4). Other sources include Turkemenistan and Azerbaijan.
Iran’s leadership has long been aware of its vulnerability to gasoline sanctions and has consequently developed plans to survive them. Steps have been taken to curb the consumption of gasoline. A 25% increase in the prices of subsidized an non-susidized gasoline followed by a national rationing program limiting drivers to 100 liters per month in 2007 provoked riots in Iran. Ahmadinejad also passed a law in the same year requiring carmakers to manufacture dual use vehicles that can run on gasoline or natural gas. Natural gas now accounts for 10% of the fuel usage in Iran (5). Efforts have also been made to improve public transportation. Iran began implementing these measures under the fourth economic plan (2005 – 2009) and has achieved limited success thus far with gasoline subsidies consuming nearly a third of the national budget (6).
The “goal-oriented” subsidies plan
This plan was introduced by Ahmadinejad in December 2008 but the parliament did not pass this plan. The name of this plan bears no relation to its actual contents and implications. This is a five-year plan to put an end to government subsidies, thus returning to the government one third of its fiscal budget. Quotas will be reduced from 100 to 80 liters at an increased cost of 40 cents per liter (currently at 10 cents) and the price of gasoline above the quota would increase to 65 cents a liter (currently at 40 cents).
On January 14, 2010, Iran’s top legislative body approved this controversial plan to phase out energy and food subsidies. The Guardian Council’s final approval of the plan, which would make Iran less vulnerable to sanctions on fuel imports, followed a compromise agreement reached between President Ahmadinejad and the parliament over control of the money the state stands to save. Under the compromise just reached, a government body would be established to receive and spend the savings without being required to provide details of its operations (7). The “goal-oriented” portion of this plan refers to government handouts of $75 a month to families with annual incomes of $350 or less to compensate for higher gasoline prices. This leaves approximately $17 billion in saved revenue for the Ahmadinejad government (8). To date, the government has been tip-toeing on the implementation of this plan. Not one step has been taken so far because of the fear of public outrage. The implications of this plan have been muddled in the Iranian press so that the Iranian public will not have a clear understanding of this plan for if they do, riots are sure to follow.

The implications of gasoline sanctions on the Iranian People
When once asked about apparent inconsistencies in his economic policy, Mahmoud Ahmadinejad replied, “I pray to God that I will never know about economics”. Since his presidency, the rate of inflation has risen from 12.1 to 25.2 percent according to the Central Bank. The parliament research center has estimated that his “goal-oriented” subsidies plan would cause inflation to jump to 48.6%. Unemployment rates are officially at 16%. The actual figures are much higher because the government’s definition of unemployed does not include those who work three or four hours a week.
The bill that was rejected before from fear of more social unrest was approved this time because of the impending sanctions. Gasoline sanctions will provide the regime with the arsenal it so desperately needs for implementing this plan. The average Iranian who is already burdened with high living costs and low incomes will then have to deal with prices doubling every two years. The elimination of subsidies will mean more hardship for middle-class Iranians. Moreover, they will have to face a richer and more powerful government that can buy more thugs to crush their peaceful protests.
The implications of a gasoline sanction on the government
Iran could seek to address any deficit in supply wrought by gasoline sanctions by seeking alternate suppliers on the international market. While such suppliers would likely face increased costs and legal difficulties for doing business in Iran, the 128,000 barrels per day (if China participates in the sanctions) or the 80 – 90,000 barrels (if China does not consumption) gap that Iran would seek to fill could result in huge revenues and potential Iranian gasoline market dominance for those willing to bear the risks.
Venezuela, China, Turkmenistan, international oil companies using third parties or shell companies and smuggling from neighbors such as Iraq are the most likely candidates for alternate international gasoline supply for Iran. Furthermore, Iran has a reported 1.4 billion liters of gasoline in reserve, which could provide roughly 24,000 barrels of gasoline per day for one full year.
The recent “goal-oriented subsidies” bill cannot be implemented now without riots and mass uprisings. The imposition of sanctions will make its implementation not only possible but necessary. Domestic gasoline consumption in Iran will then be reduced drastically as more and more people are priced out of the gasoline market due to skyrocketing inflation. As the government spends less on importing gasoline and its subsidies, it will have more to spend on oppressing its own people, supporting terrorist organizations, and buying friends in Latin America and Africa.
Gasoline sanctions will only benefit the Islamic Republic and its Islamic Revolutionary Guards Corps (IRGC). The government will be $17 billion richer this year and $100 billion richer in the course of five years; the IRGC will add gasoline imports to its already vast portfolio of legitimate and illicit businesses.
Oil Sanctions
In contrast to any other sanctions that can be imposed by the international community, sanctioning Iranian oil and natural gas is the only one that targets the Islamic Republic’s lifeline - billions of dollars of oil and gas revenues. The thought of sending such shockwaves throughout the oil market have been so frightening that hardly anyone has dared to talk about it. A simple reference to the aftermath of failed sanctions, however, will put things in perspective.
If sanctions fail
Years of blatant lying and toying with the international community has convinced even the most optimistic observers that the Islamic Republic’s nuclear program is anything but peaceful. The government’s unspeakable crimes inflicted on their own people since the June 2009 elections were televised across the globe and the world learned what Iranians have known for years. This theocratic regime is a dangerous and criminal government that cannot be trusted to conform to any international laws or agreements. Moreover, their lack of regard for human life, let alone human rights, makes the thought of their being armed with weapons of mass destruction all the more frightening. This has put an end to the theory proposed by some that the world simply must learn to live with a nuclear Islamic Republic.
There is no doubt left in anyone’s mind that the Islamic Republic must be stopped. If sanctions fail, the next step will undoubtedly be military action. It will not matter who attacks Iran - the United States, Israel or a coalition of nations. The Islamic Republic will undoubtedly retaliate, nuclear weapons or materials may be used and utter devastation will follow. Nobody wants this.
If military actions are launched, what will happen to the price of oil? And how long will this war last? Clearly, a sudden attack on Iran will send oil prices skyrocketing and the bad news will be that this may last for years.
A planned oil sanction is the best solution
Iran is the world’s fourth largest oil producer. According to the Iranian Chamber of Commerce, Iran’s oil revenues last year approached $83 billion. The Iran Customs Administration includes liquefied natural gas in its non-oil exports so its statistics distort the real data. A conservative estimate will put oil-related exports at 85% to 90% of Iran’s export revenues. Unlike Western countries, income taxes in Iran are a nominal part of the government’s gross revenues.
A sanction on Iran’s oil and natural gas will seriously impede the in-flow of money and paralyze the government. By some accounts, 40% of the Iranian work force is hired directly or indirectly by the government. Drastically cutting the government’s revenues will render it unable to pay the salaries of these employees, and above all, the salaries of lower ranking members of the Islamic Revolutionary Guards.
To mask his incompetence, Ahmadinejad has gone on a spending spree in the past few years and has raided Iran’s foreign reserves. There are no clear and official reports on how much is left in the foreign reserves, but a report leaked by a parliamentarian in October 2008 estimated it at $7 billion. With no money left to squander on buying friends abroad, or to wreak havoc in the region, or to pay their militant thugs to crush any peaceful protests, the Islamic Republic is likely to collapse within a few months.
A carefully planned sanction on Iranian oil exports should have provisions for off-setting the loss of Iranian oil exports with an agreement for increased production by other OPEC and non-OPEC members who are easily able to make up for this shortage in supply, namely Saudi Arabia. Although there will be a temporary price hike, it will not shock the market. This is in sharp contrast to a military strike with consequences that can neither be anticipated nor controlled.
Another consideration is whether China and Russia will participate in this oil sanction. If the European Union and the United States agree to impose a sanction on Iran’s oil exports, China and Russia will realize that the next option is military action and that is an undesirable option for them as well. But assume that China and Russia will not participate in the oil sanction.
The Iranian Chamber of Commerce puts China as Iran’s third biggest trading partner with Iranian oil exports to China at roughly $15.8 billion and China’s exports to Iran at roughly $11.2 billion. Although China is a big buyer of Iranian oil, it can hardly make up for the $67 billion that Iran will lose due to the sanctions.
Russia does not buy Iranian oil as it is the second biggest oil producer in the world. Slogans of “Death to Russia” chanted by Iranian protesters already have signaled to Russia how its support of the Islamic Republic in general and Ahmadinejad in particular has been received by Iran’s people. There is a new reality in Iran and that is the Green Movement. Sooner or later it will prevail and Russia stands to lose a trump card in its relations with the West. The participation of the EU, Japan, India and other significant importers of Iranian oil is enough for these sanctions on Iranian oil imports to succeed.
Conclusion
Sanctions on the Islamic Republic must be effective to avoid military confrontation. Sanctions other than the sanction on Iranian oil, such as a gasoline import sanction, will not only be ineffective but might actually strengthen the government of the Islamic Republic. This regime is in its moment of desperation economically, politically and socially. The free world should have the courage and the foresight to inflict a crippling blow on this menacing dictatorship and the sole way is a sanction on Iranian oil -- the mullahs’ lifeline.
Amir A. Fakhravar
Confederation of Iranian Students (CIS)
Washington DC, January 25, 2010
………………………………………………………………………………………….
Footnotes:
1. Daily Gasoline Consumption nears 65 mln Shana, Iran June 8, 2009
2. Iran September gasoline imports seen steady vs August-Reuters-August 25, 2009
3. Iran. Energy Information Administration, February 2, 2009
4. U.S. fuel sanctions to hurt Iran, a boon for traders, Reuters, August 6, 2009
5. Iran’s five efficient measures to fight the petrol sanction, Alef News, Iran
6. In 2008, gasoline subsidies accounted for 35% Iran’s national budget, www.asrenou.net
7. Iran approves the elimination of subsidies, The National, January 14, 2010
8. After elections, Iran moves to remove subsidies, Press TV, July 8, 2009

3 comments:

Melody said...
This comment has been removed by a blog administrator.
mina z said...

mina

xx Irani said...

That's Great...

Locations of visitors to this page