Iran, awash with crude oil, is finding itself short on refinery capacity. The results aren't pretty.
TEHRAN: Angry drivers set fire to some gasoline stations here after the government announced that fuel would be rationed beginning Wednesday.
The government first planned to start the rationing a year ago, but put the decision off repeatedly out of fear that it would lead to unrest. The plan was announced only a few hours before it took effect. State television reported Wednesday that "several gas stations and public places had been attacked by vandals."
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The new rules limit drivers of private cars to 100 liters, or 26 gallons, every month at the subsidized price per liter of 1,000 rials, or 10 cents. Taxicab drivers are limited to 800 liters a month.
And then there's this...
The government is still considering whether to allow drivers to buy additional fuel at higher prices.
At 10 cents per liter, I can understand why they have issues with low refinery capacity. Even if the crude oil was free, the cost of running the refinery would make it a rather dicey proposition. Since the government subsidizes gasoline to keep the prices low, one would have to expect that only government subsidies will rectify the refinery capacity issue. Meanwhile the economy continues to grow and demand increases. Something has to give.
Allowing additional purchases at a higher price might be warranted as a stop-gap measure. I would suppose that more comprehensive solutions will be politically difficult.
Once you subsidize, you can never go back. So don't. Or at least don't do it so extreme.
I especially liked the part were the government said it won't allow additional sales at the international price because it would fuel inflation. Talk about priorities (and not really "getting" inflation).
The interesting question is why they do not sufficient domestic refining capacity -- is
there something about the crude it produces
that does not lend it to making gasoline?
That is a real problem with the heavy crude in Venezuela.
But the other question is are they really subsidizing gasoline. Although the market price of oil is around $70 the cost of lifting Iranian crude is just a few dollars -- the difference is a tax the OPEC countries levy on foreign consumers. So if they domestic price of gasoline just reflects the domestic cost of crude, is that a
subsidy? It would not be completely illogical for an OPEC country not to impose this tax on its own residents. Don't most OPEC countries have much lower gasoline prices then the major consuming countries?
Maybe everything I say is wrong, but I would like to have a few more facts before jumping to all kinds of conclusion on the basis of assumption that may not be accurate.
Spencer,
I'm just going off of what is in this and any number of similar news articles that hit the wires yesterday. But here's my take.
You are indeed right to say that the difference between the cost of lifting Iranian crude and the actual world price is like a tax that OPEC imposes on the rest of the world. (With the proviso that non-OPEC producers get some of the benefits as well.)
Now, if they used that crude to refine their own gasoline for domestic use, you would certainly expect the price in Iran to be lower than in the U.S. No problems there. However, they import half of their gasoline due to the limited refinery capacity (according to the article). Now perhaps they could import it from a fellow OPEC member and negotiate a price that is still lower than what we would pay. That's possible, but I have no idea if it is really the case. Even so, I have to believe that they're getting charged more than 10 cents per liter (or about 38 cents per gallon).
Maybe they can refine their own crude and profitably sell it at that price (or nearly so), but not the imports unless they had a sweetheart deal with an OPEC neighbor. (Again, I don't know what import arrangements they have, but I doubt they are that good. Wouldn't the refining and transport costs exceed 38 cents/gallon?)
So I ask you this. Is a price of 38 cents per gallon going to give anyone enough incentive to increase refinery capacity?
If it cost $4 to lift a barrel of Iranian crude that works out to be under $0.10 per gallon leaving a refining margin of $0.28. I do not know what the cost of refining is in Iran, but a figure nearly three times the cost of the crude implies it should provide plenty of incentive.
I goggled the issue and came up with a reasonably complete story.
First, refining is a public sector industry so the economics are secondary.
Second, Iran has budgeted a doubling of refining capacity.
Several problem are preventing them from building new capacity. But one of the main reasons is US economic sanctions and pressure on the few firms with the ability to build refineries to but Iran at the end of the queue.
But what it comes down to is standard economic theory has little to do with the issue and refinery profitability is not really an issue.
You raise a couple of points that deserve a separate post.