Who's Rationing Fuel in Iran?

Over the last few weeks, news reports such as this one on the BBC news site have recorded the incidences of public and violent protests by some citizens of Iran because of the institution of a rationing of fuel that will be provided at heavily subsidized prices. To this blogger, apart from the reasons given about the need to build new refineries to process more petroleum, it is a bit clear that the economists in Iran ought to use this mini-crisis as the opportunity to educate their garrulous president on price theory. They may start by making this simple statement: Any good or service that is provided below cost will eventually have to be rationed because it will be consumed at far higher quantities than is efficient. added to the inflation rate that is estimated at between 20-30% annually, something will eventually have to give. The violence and the queuing is part of that large cost.

Covering the same story, this article in the Houston Chronicle reports that the animated crowds seemed to blame it all on president Ahmedinejad and wondered why a nation that bears a large endowment of crude petroleum should have to ration fuel. This is not a serious question and to assign the fault to an individual is unfair because the heavy subsidies are not entirely his creation. It has merely unraveled during his watch, no doubt prompted by the fear of impending sanctions regarding the ongoing plans to construct a nuclear complex that could be used for weapons production. In all fairness too, that substantial subsidy estimated at close to US$ 10 billion per annum could have been better designed and issued in form of vouchers.

While the sanctions would probably be an ineffective and blunt political tool, the main lessons ought to be that the great revenues from the sale of petroleum are not used well in keeping petroleum prices artificially low and that industrial policy ought to concentrate on expanding refining capacity. The pursuit of a nuclear plant building plan seems throughly misplaced while the crowds are rioting because of the lack of fuel.