Dec 3, 2018

Smuggling in general and fuel smuggling in particular have continuously undermined the Iranian economy for a long time. Over the past few months, after the sharp devaluation of the Iranian rial, fuel smuggling has increased and it is estimated that 10 million to 20 million liters of fuel, i.e., 12-24% of Iran's daily consumption (especially diesel and gasoline), is smuggled out of the country. In an apparent bid to contain the runaway smuggling, Iranian authorities recently reintroduced fuel cards — a policy that had been introduced in 2007 as a prelude to introducing higher fuel prices and eventually removing fuel subsidies. The subsequent subsidy reform plan, which was initiated in December 2010, was relatively successful in curbing consumption but faced challenges in the later phases of its implementation.

In a Nov. 19 announcement, the National Iranian Oil Products Refining and Distribution Company (NIOPRDC), a subsidiary of the Oil Ministry, asked owners of cars and motorcycles to reactivate their old fuel cards or apply for new ones. The decision to reintroduce fuel cards had already been communicated in January this year but had not been implemented. In order to reduce the cost of issuing and managing millions of new fuel cards, the Central Bank of Iran declared that existing bank cards could also be used as fuel cards. The base data would be the national identity numbers of vehicle owners and the relevant information would be stored on the databases. It is expected that within the next few weeks the government will have the technical tools needed to make the use of fuel cards obligatory in gas stations.

Iranian officials have stated that there will be no fuel rationing. Oil Minister Bijan Zanganeh has stated that the core objective of the program is to contain fuel smuggling. At the same time, he has also admitted that fuel cards alone won’t stop smuggling but that they will rather “reduce the volume of smuggling.” According to Mohammad Reza Pour Ebrahimi, head of parliament’s economic commission, “The main objective is to manage consumption” and not to increase fuel prices. Assadollah Gharakhani, spokesperson of the parliament’s energy commission, stated that the main objective of the plan would be to counter smuggling by gauging whether gas stations are distributing their products to end users, and, if yes, whether cars are using a conventional amount of fuel.

Nonetheless, there is concern among ordinary Iranians that in due course rationing will take place, creating a domestic black market for heavily subsidized fuels, especially gasoline. Furthermore, many expect a price hike in the next Iranian year (beginning March 21, 2019) — a prospect that even officials view as a possibility. In a year in which Iranians had to endure many negative economic developments, such as the devaluation of the national currency, it is evident that the government is being careful not to allow the plan to negatively impact Iranian society. The question is whether the plan will be advantageous to the country’s economy as a whole.

There is no doubt that high fuel consumption has plagued the Iranian economy and energy sector for decades. Low fuel efficiency of motor vehicles, a lack of public transportation options and low subsidized prices have been the main causes of runaway consumption, with its negative environmental, social and economic consequences. It is also clear that the recent devaluation of the rial has made subsidized fuel in Iran very inexpensive, leading to lucrative opportunities for smuggling fuel into neighboring markets. So, the authorities need to address two interrelated issues: high fuel consumption and fuel smuggling.