Why is an oil-rich nation like Iran importing so much gasoline?

Answers to your questions about the news.
Nov. 2 2007 6:09 PM

Why Is Iran Importing Gasoline?

Other oil-rich nations don't have to.

Iranian oil fields. Click image to expand.
Why does Iran import gasoline?

Two weeks ago, Iran's parliament approved legislation aimed at controlling the ballooning cost of the country's gasoline imports by getting Iranians to drive less. This may seem odd, given that Iran has the world's third-largest oil reserves and used to give gasoline away for pennies per gallon. Why are they now importing fuel?

The country's aging and inefficient refineries can't meet its swelling demand for gasoline. Iran may be brimming with crude oil, but it can't convert enough of the raw product into refined fuels like diesel, kerosene, or gasoline. International sanctions and political pressure from the United States and other countries have discouraged multinational energy companies from making large-scale investments in Iran's infrastructure. Meanwhile, Iranian domestic energy policy—including heavy subsidies for gasoline—has encouraged waste and increased domestic demand.

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Refineries don't come cheap: In the United States, it can cost billions of dollars to set up a brand-new facility. Iran might be able to put one together for less, given its more relaxed environmental regulations. But the Iranians would still need to make a huge investment to offset their high demand for gasoline and reduce the need for imports. Other countries draw development money from energy companies in exchange for market access. But many companies have shied away from making such deals with Iran. They face direct sanctions from the United States and United Nations, as well as political pressure discouraging involvement. More generally, Iran is known for a restrictive, bureaucratic business environment that can scare off investment.

Demand for gasoline is artificially high in Iran, due in part to domestic subsidies. The government has for years used the profits from oil exports to provide gasoline to its people for as little as 12 cents per gallon—less than one-third of what it costs to make it. The subsidized gas prices led to increased dependency on automobiles, and consumption increased by more than 10 percent per year in the early 2000s.

Smuggling exacerbated the problem. Given the cheap price of gasoline, Iranians found it profitable to buy fuel in their home country and sneak it into neighboring states like Pakistan, Turkey, and Afghanistan, where it commanded higher prices on resale. With the supply dwindling, the country was left with the choice of trying to produce more gasoline—at a loss, given its heavy subsidies—or facing major shortages and the need for imports.

Tehran's response, earlier this year, was to ration gasoline and reduce subsidies. Needless to say, Iranians accustomed to free-flowing gasoline at 12 cents per gallon weren't amused by higher prices and long lines at the pump. The policy change prompted violence against gas stations, further limiting supply. Now, even with reduced subsidies, Iran still sells gasoline for about 40 cents per gallon, less than one-third what it sells for in neighboring Iraq. Not surprisingly, a thriving black market has popped up across that border, too. This undermines the government's rationing efforts, and overall Iranian consumption remains high, spelling a need for continued imports.

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Lee Hudson Teslik is assistant editor of CFR.org at the Council on Foreign Relations.

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