Iran Spends Tens Of Billions Of Dollars A Year On Energy Subsidies

Iran offers the highest amount of energy subsidies in the world, the government news agency IRNA has highlighted amid a big financial crunch and budget deficit.

In a detailed article on Friday, IRNA again raised the issue of subsidies, this time the cheap energy the Islamic Republic has been providing to businesses and individuals for more than 40 years, costing the government hundreds of billions of dollars.

The ultra-conservative government of President Ebrahim Raisi that assumed power last August has been hammering on the issues of food and fuel subsidies amid United States sanctions that have drained its coffers. His administration is in a position to raise the issue, since ultra-conservatives are in full control of both the executive and the parliament, without fear of any organized opposition.

IRNA says that in total Iran paid almost $30 in indirect energy subsidies in 2020, as it sold gasoline, diesel, electricity and natural gas eight times cheaper to its people than minimum prices in the Persian Gulf region, which already has low prices.

The result was that compared to world total of $181 billion in energy subsidies, Iran was the biggest single provider with more than 16 percent of the world total. If we look at the breakdown, the government offered indirect subsidies of $5 billion in oil products, $12.5 billion in electricity and $12.2 billion in natural gas.

Iran’s share of global natural gas subsidies is 33 percent and for gasoline 35 percent.

A gallon of gasoline is sold to people for a little over 20 US cents, while in the Persian Gulf region bulk gasoline prices are over two dollars a gallon.

No one really can say why the government has kept selling energy so cheaply for the last 33 years, after wartime emergency ended when the Iraq-Iran eight-year conflict came to a close in 1988. The revolutionary Islamic government that came to power in 1979 promised free electricity and water to the population and then war broke out in 1980, which forced the new regime to guarantee the essential amount of food and necessities to a shell-shocked population.

After the war, as a new government somewhat liberalized the economy, no one seriously dealt with the problem of energy subsidies, although some occasionally raised the issue. But overtime the low rate for electricity and gas resulted in extremely high usage by consumers, to the extent that Iranian households have one the highest rates of gas consumption in the world.

Iran is third after Russia and the United States in per capita gas consumption, to the extent that as the holder of the second largest gas reserves in the world it is barely able to satisfy domestic consumption, with little left for export to Iraq and Turkey.

Still, the $30 billion spent to provide cheap energy cited by the government would be much higher if the Iranian currency had not lost its value eightfold since 2017. The subsidy amount converted into dollars is much less than the $45 billion mentioned a few years ago as annual energy subsidy cost. In 40 years, the total for energy subsidies would be more than one trillion dollars, a huge amount for a country that has lagged in investments into its oil and gas sector.

Although the Raisi administration seems to be more than willing to reduce subsidies, the regime as a whole is not ready for the possible political risks involved. In November 2019 when the government raised gasoline prices, unrest engulfed the country and ended with hundreds dead as security forces used military weapons to fire on protesters.