- The Washington Times - Monday, May 28, 2007

CAIRO — A decision to raise gasoline prices has thrown light on one of Iran’s most entrenched problems: the danger a vulnerable, subsidized economy poses for a country under international pressure over its nuclear program.

Analysts warn of the popular backlash that other countries have faced when dealing with the same need to raise long-subsidized staple prices, as in Indonesia, which had a wave of protests in 2005.

At the same time, they doubt the 25 percent price increase imposed last week on Iran’s gasoline will do much, on its own, to solve the country’s underlying economic problems.

Even after last Tuesday’s decision to raise gasoline prices from the equivalent of 30 cents a gallon to 38 cents a gallon, Iran has some of the lowest gas prices in the world, and fuel remains cheaper than drinking water. Those prices have led to unnaturally high demand and have saddled the government with fuel subsidies that cost billions of dollars a year.

The demand also forces Iran to import more than half the gasoline it consumes because it lacks enough refinery capacity — a glaring vulnerability as the United States and its allies look for pressure points in negotiations over Iran’s nuclear program.

Officials and analysts told Reuters news agency yesterday that the United States is piling pressure on European banks and energy firms to avoid doing business with Iran.

Concerned that Iran is working to develop nuclear weapons, Washington is leading international efforts to isolate the Islamic republic and has imposed sanctions on two Iranian banks.

Sanctions imposed by the United Nations also have targeted an Iranian bank, but the U.S. arm-twisting may be having a stronger effect, with one bank withdrawing financing for a major gas deal and oil majors rethinking investment. An American official warned multinationals in March to steer clear of the second-biggest producer in the Organization of Petroleum Exporting Countries.

“The world’s top financial institutions and corporations are re-evaluating their business with Iran because they are worried about the risk and their reputations,” said Stuart Levey, the U.S. Treasury’s top counterterrorism official.

However, Amy Jaffe, an energy analyst at Rice University’s James A. Baker III Institute for Public Policy, said the “gasoline import issue is the Achilles’ heel for Iran. It shows the vulnerability of their economy.”

Consistently high oil prices over the past few years have helped the economy grow more than 4 percent annually and left Iran awash in petroleum money, masking the economy’s underlying weakness.

The country lacks the investment it needs to reverse its falling oil production because billions of dollars are spent instead on subsidies for fuel, food, paper, fertilizer, pharmaceuticals and other products.

Outside analysts estimate that Iranian energy subsidies alone, including gasoline and natural gas, amount to $30 billion, or 15 percent of the country’s entire economy, and total subsidies are close to twice that figure.

Conservatives in Iran’s parliament, especially those aligned with the country’s national oil company, have long pushed for higher gasoline prices.

The government has been criticized for withdrawing billions of dollars to pay for domestic expenditures, such as the subsidies, from a fund it set up in 2000 to hedge against any downturn in oil prices and invest in the energy sector.

“They have so much more revenue than they ever thought they would have,” Miss Jaffe said. “Yet at $70 per barrel, they were taking money out of the oil stabilization fund, not putting it in it. That’s unsustainable.”

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