Iran’s fuel price crisis shows sanctions are crippling its economy

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Iran's latest decision to hike fuel prices by nearly 50 percent is a desperate attempt to lower domestic consumption and free up more gasoline for exports, industry sources told Al Arabiya English, as the country faces pressures from US sanctions and its failing proxies across the Middle East.

“We believe the new pricing policy is aimed at controlling sky-rocketing local consumption in Iran, thus, to increase fuel smuggling to neighboring countries when the government is suffering from low oil revenues,” FGE Energy said in a note.


Iran once had a lucrative crude oil industry and was a large gasoline exporter due to the development of its Persian Gulf Star refinery in the port city of Bandar Abbas.

But now, the country cannot formally export oil internationally without the recipient falling foul of US sanctions. Instead, amid a faltering economy and protests in Iraq and Lebanon undermining Tehran’s regional influence, Iran has been rebranding its fuel oil and gasoline shipments and selling them to middlemen, who then transfer it to end users.

Fuel oil is “rebranded and re-documented as Iraqi-sourced,” said Iman Nasseri, an analyst at London-based energy consultancy FGE Energy. Gasoline is likewise rebranded as Omani-sourced, “or other sources where they can get the documents issued for those cargoes.” “

It’s not known where it goes,” Nasseri added.

In defiance of US sanctions, Iran will export about 10,000 to 20,000 barrels per day (bpd) of gasoline surplus to neighboring countries in the next couple of years, according to FGE.

On November 15, the country hiked fuel prices across petrol stations and pumps, claiming that it would use the money to help citizens in need of cash handouts. But, on Wednesday, protests continued for the fifth straight day despite government efforts to quell popular unrest.

Because of Iran’s fuel price increase, FGE expects the country’s gasoline demand growth rate to flatten in 2020, compared to a 9 percent growth in the first ten months of 2019.

Funding proxy wars

Iran’s drive to export oil, no matter the cost, is also linked to its support for regional proxy organizations.

Tehran has been blamed for years of providing financial and tactical support to militant groups across the Middle East, including Hezbollah in Lebanon, Shia militias in Iraq, the Houthi militia in Yemen, and a network of foreign fighters in Syria.

According to Cyril Widdershoven, director at Dutch consultancy Verocy, higher exports of gasoline may be required for Iran to “supply its support groups or proxies elsewhere.”

Iran’s regional proxy network has been a target of protesters’ anger during the ongoing demonstrations.

Protestors have chanted “Death to the dictator,” a sign of rising anger against Iran’s Supreme Leader Ali Khamenei, and “No Gaza. No Lebanon, I give my life for Iran,” in reference to Tehran’s support for the Palestinian group Hamas in Gaza and Hezbollah in Lebanon, suggesting protesters believe that the billions of dollars spent to keep the regime’s proxies afloat could instead be used towards fixing the economic situation at home.

Iran’s unemployment rate stood at 12.1 percent as of April to June 2018, and about 10 million to 20 million people reportedly live below the poverty line.

“The [latest] gasoline riots are only a sign that there is a movement growing and willing to challenge the current internal power structures ... It also shows that US sanctions, whatever people are stating, are biting really at present,” Widdershoven added.

Economic collapse

At the center of Iran’s current economic crisis is its battered oil industry – representing nearly 15 percent of the country’s gross domestic product (GDP) – which has faced US sanctions since President Donald Trump withdrew the country from Tehran’s nuclear agreement with world powers.

Since the sanctions have come into place, Iran’s oil output has fallen every month as exports dried up. In October, the country produced 2.15 million bpd, down from 3.33 million bpd, a year earlier.

“The rise in petrol prices is the direct consequence of the fall in Iranian production and crude oil exports due to US sanctions,” PVM Oil Associates analyst Tamas Varga told Al Arabiya English.

Iran is reportedly exporting about 500,000 bpd of crude oil, significantly down from its pre-sanctions level of 2.5 million bpd.

This is a loss of about $120 million per day, which “is a serious loss of petrodollars and somehow it had to be, at least partially, compensated,” Varga added.

Amid dwindling oil exports, Iran last year spent $69 billion on its generous fossil fuel subsidies program – more than any other country in the world.

The country’s economy is expected to contract 10 percent in the financial year 2019-2020 from its size two years earlier, according to the International Monetary Fund (IMF). For Iran to balance its budget in 2020, an oil price of nearly $195 a barrel would be required, one of the highest in the world, the fund said.

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