VZCZCXRO8327
RR RUEHBC RUEHKUK
DE RUEHDE #4992/01 2141427
ZNY CCCCC ZZH
R 021427Z AUG 06
FM AMCONSUL DUBAI
TO RUEHC/SECSTATE WASHDC 2845
INFO RUCNIRA/IRAN COLLECTIVE
RHEHAAA/NATIONAL SECURITY COUNCIL WASHINGTON DC
RUEHAD/AMEMBASSY ABU DHABI 1686
RUEHZM/GULF COOPERATION COUNCIL COLLECTIVE
RUEAIIA/CIA WASHDC
RHEFDIA/DIA WASHINGTON DC
RUEHDE/AMCONSUL DUBAI 5837

C O N F I D E N T I A L SECTION 01 OF 02 DUBAI 004992 
 
SIPDIS 
 
SIPDIS 
 
E.O. 12958: DECL:  8/2/2016 
TAGS: IR PREL PGOV ZP EPET ETRD ZR
SUBJECT: IRAN TO CONTINUE GASOLINE SUBSIDIES 
 
REF: A) DUBAI 501, B) DUBAI 399 
 
DUBAI 00004992  001.2 OF 002 
 
 
CLASSIFIED BY: Jillian L Burns, Acting Consul General, Dubai, 
UAE. 
REASON: 1.4 (b), (d) 
 
 
 
1.(C) Summary: Public statements by the Iranian oil minister and 
Majles Economic Commission (MEC) head this past week suggest 
Iran will appropriate money to continue gasoline imports and 
subsidies for the second half of the year. The Ahmadinejad 
administration and Majles were at odds after the oil minister 
announced June 23 that Iran would ration gasoline while holding 
prices constant beginning September 23 (when funds for imports 
are scheduled to run out). Majles deputies voiced their 
opposition to rationing almost immediately, offering two 
alternatives. Many favor a two-tier pricing mechanism based 
either upon the amount of gas bought or personal means. 
Alternatively, a faction led by the MEC head believes neither 
rationing nor two-tier pricing are viable until the government 
institutes longer-term solutions such as enlarging the public 
transportation fleet and converting gasoline engines to natural 
gas. For now, this faction has won the policy debate, and a 
professor from Tehran says gasoline imports will continue to 
avoid risk of agitating the public. End Summary. 
 
Gasoline Imports to Continue 
---------------------------- 
 
2.(U) Official statements this past week suggest Iran will 
continue gasoline imports during the second half of the Iranian 
year (Sept. 23, 2006 - March 22, 2007). On July 24, Majles 
Economic Commission (MEC) head Kamal Daneshyar said the 
government should submit a four billion dollar bill to the 
Majles to continue imports, taking money from the Foreign 
Exchange Reserve Fund. Reuters reported July 30 that Oil 
Minister Kazem Vaziri-Hameneh agreed importing gasoline "for the 
next few months" was necessary, although a final decision would 
not occur until the Majles returns from summer recess in two 
weeks. The same day, Mehr News Agency, without attribution, said 
the Energy Department of the Management and Planning 
Organization had begun to draft a three billion dollar law for 
the imports, drawing from the Oil Stabilization Fund. Managing 
Director of the National Iranian Oil Refining and Distribution 
Company Mohammad Reza Nematzadeh said given current prices, Iran 
would need around 3.5 billion dollars for the rest of the year, 
part of which has already been approved (he did not say how 
much). (Comment: It is unclear how the discrepancies over the 
amount of funds and which account to draw them out of will be 
settled. End Comment.) 
 
3.(U) Continuing gasoline imports reverses two of 
Vaziri-Hameneh's previous statements. The Majles budgeted four 
billion dollars for imports this Iranian year (March 23, 
2006-March 22, 2007), but in April Vaziri-Hameneh announced the 
government cut that figure to 2.5 billion, meaning subsidies 
would run out halfway through the year on September 22. 
Vaziri-Hameneh then said June 23 the government would start 
rationing gasoline on September 23 to make up for lost gasoline 
supply (reftel B). (Note: On July 31, National Iranian Oil 
Company Director for International Affairs Hojjatollah 
Ghanimi-Fard said money for imports would run out a month 
earlier. All other official statements echoed the September 23 
date. End Note). 
 
4.(U) Vaziri-Hameneh's calls for gasoline rationing sparked 
opposition from the Majles. Until he agreed to continue imports, 
the administration and MPs dueled in the press and in closed 
meetings over appropriate gasoline policy. During that debate 
three factions emerged, each with their own solutions to what 
daily Donya-ye Eqtesad (World Economy) called "presently~one of 
the most serious problems faced by the government," and 
reformist daily E'temad termed "the most challenging economic 
debate for the government." 
 
Three Solutions: Rationing, Dual-Pricing, or Continuing Subsidies 
--------------------------------------------- -------------------- 
 
5.(U) According to Vaziri-Hameneh, Interior Minister Mostafa 
Pourmohammadi, and government spokesman Gholam Hossein Elham, 
the administration originally favored rationing gasoline once 
government subsidies run out (reftel B). The administration 
opposed raising the price of gasoline from the current 9 
cents/liter (34 cents/gallon)  to avoid triggering further 
inflation (already at around 12 percent). The government is also 
concerned about sparking popular unrest, which has occurred in 
the past after price hikes on essential goods. As to how 
rationing would work, subsequent statements by Vaziri-Hameneh 
 
DUBAI 00004992  002.2 OF 002 
 
 
and news reports suggested motorcycles would receive 1 
liter/day, personal cars 2.5-5, cab companies 15 
liters/day/vehicle, and private taxis 30 liters/day. Buses and 
trucks might receive more. The government would eventually 
distribute rations via "smart-cards" (reftels A, B) that deduct 
from electronic balances at filling stations. Until then, the 
government would use coupons. 
 
6.(U) In contrast, many MPs favor "two-tier" or "dual" pricing 
and have suggested two variants. First, prices might differ 
depending on the quantity of gasoline purchased. Consumers would 
buy their first three liters at a subsidized price, for example, 
but afterwards pay market price or on a sliding scale with 
prices increasing along with the quantity of fuel. Second, 
prices paid could depend on income or other personal financial 
variables. 
 
7.(U) Daneshyar leads a faction of MPs who want to continue 
subsidies.  They call for 26 conditions from "Note 13" -- an 
addendum to this year's Budget Law - to be put in place before 
the government institutes rationing or two-tier pricing. Note 13 
allocated 5 billion dollars to, among other measures, expand the 
public transportation fleet, phase out dilapidated cars, make 
engines more efficient, and convert engines to run on natural 
gas. Daneshyar's faction has apparently won the policy battle 
thus far. 
 
8.(C) A chemical and facility engineering professor from Tehran 
told Acting CG and PolEconoff August 2 that Iran must continue 
gasoline imports or face a crisis because, he implied, the 
people would not accept rationing. He said the government is 
building compressed natural gas (CNG) stations -- albeit at a 
slow pace -- and has converted some cars and buses to CNG. The 
government began a program several years ago to buy up old cars 
and provide loans for new ones, but most poor people cannot 
afford new vehicles. The professor also said some Tehranis send 
their old, inefficient cars to other cities -- exporting 
pollution. 
 
9.(C) Comment: The Ahmadinejad administration's backtrack on 
rationing illustrates two points. First, Iran is unlikely to 
wean itself off low gasoline prices in the near future. Prices 
are so far below market value that any effort to remove 
subsidies would cause enormous fall-out. Iranians feel entitled 
to cheap gasoline with their vast oil reserves. Furthermore, 
inflation continues to plague the economy, the Ahmadinejad 
administration maintains a populist platform, and precedent for 
unrest after price hikes exists. As MEC member Iraj Nadimi 
opined July 9, "The present government and Majles do not have 
the necessary courage for adopting a rationing scheme or a 
two-tier pricing scheme." 
 
10.(C) Comment continued: Second, although Ahmadinejad retains 
Iran's bully pulpit, his administration again showed its 
political inexperience and relative weakness within the 
government. Deputy Oil Minister Mohammad Reza Ne'matzadeh 
claimed June 28, "the government is definitely planning to 
ration gasoline in order to control the increasing consumption." 
Vaziri-Hameneh's backtrack July 30, however, indicates the 
administration did not clear its plan with the Majles nor fully 
consider its economic or popular viability before announcing it 
-- a beginner's mistake. In addition to potential unrest, 
rationing gasoline without changing prices would probably 
produce a black market and even more corruption. The 
administration and particularly Vaziri-Hameneh lost internal and 
external credibility in this episode, and it provides another 
example that Ahmadinejad's administration does not have the 
final word within the government about Iran's most important 
issues. 
BURNS