Hossein Askari

WASHINGTON—In Washington, politicians and Iran experts have been pounding the table for what they claim to be the mother of all sanctions on Iran—a gasoline embargo. While in Tehran, Ahmadinejad and his supporters dare President Obama to go ahead and impose a gasoline embargo on Iran. They claim Iran has adequate gasoline storage and enhanced gasoline production capacity to withstand an embargo. Is there substance to Iranian claims? Would a gasoline embargo bring the Tehran regime to its knees?

Iran has the second-highest level of proven oil reserves in OPEC after Saudi Arabia, and also ranks a distant second to Saudi Arabia in oil production. These are today’s OPEC reserves and production standings. Although Iran is a major exporter of crude oil, it is a net importer of refined products, especially gasoline and diesel fuel, from a variety of sources, including China.

This surprising situation is due largely to two policy decisions made by Iran: gasoline and diesel fuel are sold by the government at heavily subsidized prices (significantly below world prices, at about 40 cents per gallon for gasoline), encouraging wasteful fuel consumption and smuggling to neighboring countries, where prices are higher. At the same time, Iran’s domestic refining capacity (1.5 million barrels per day) has not kept up with rapidly growing demand (1.7 million barrels per day), a gap of about 200,000 barrels per day of refined capacity at the light fuels end of the refining process (especially gasoline). To fill the gap, the government imports gasoline and diesel fuel at world prices and turns around and sells it in Iran at the lower subsidized price charged for domestically produced products, putting serious pressure on the government’s budgetary balance.

Facing this domestic shortfall in refined products, Tehran decided some time ago to expand its refining capacity. As a result, it seems that in about three years Iran’s refining capacity will double to close to 3 million barrels per day. This expansion, along with planned domestic price increases for gasoline and diesel fuel, should allow Iran to eliminate imports of refined products and even enable the country to become a net exporter of refined products.

These figures would indicate that Iran today has a domestic shortfall of about 10 percent in its diesel fuel needs (or roughly 60,000 barrels per day) and about 30 percent in its gasoline needs (or roughly 125, 000 barrels per day). Because of smuggling, it is difficult to confirm that this entire apparent shortfall is “real.” Namely what would be the shortfall if smuggling were eliminated? While there is no hard data on how much of this apparent shortfall is due to smuggling, one thing is certain: the Revolutionary Guards (IRGC) and the Intelligence Services are involved in smuggling. As a result, if they see it in their interest to eliminate smuggling, they could reduce it to a trickle. In other words, a part of the 180,000–200,000 barrels per day of apparent domestic shortfall could be eliminated if the IRGC and the Intelligence Services decided to reduce the smuggling of gasoline. How much would this reduction represent? That’s anybody’s guess. But I would venture to say that the real shortfall might be more on the order of 125,000–150,000 barrels per day. And smuggling would all but evaporate if the government allows fuel prices to rise in the event of an embargo.

In a recent statement, Farid Ameri, Managing director of National Iranian Oil Products Distribution Company, claimed that a fuel embargo will achieve little, and pointed out that:

• Iran has increased its stockpile of gasoline by about 1 billion liters, to 2.4 billion liters (roughly 15 million barrels), and
• Iran is using its petrochemical plants to produce 14 million liters (roughly 94,000 barrels) of gasoline per day.

If one were to take these claims at face value, the stockpile of gasoline would be equivalent to 100–120 days of fuel imports (assuming 125,000–150,000 barrels per day of fuel imports after the elimination of smuggling). The claim of gasoline from petrochemical plants would reduce the need for imports down to an even more manageable 30,000–55,000 per day, in turn stretching out the life of the gasoline stockpile to 270–480 days in case of a fuel embargo. If both Iranian claims were credible, one could conclude that Iran has a reasonable chance to survive a gasoline embargo, because it also has porous borders and, realistically, it would be impossible to enforce an airtight embargo for 270–480 days.

However, the Iranian regime’s claim about producing gasoline from petrochemical plants is too farfetched even for the most imaginative among us. To the best of my knowledge, no one has figured out a way to make such “flexible” petrochemical plants. Petrochemical plants take as their input the output of refineries (and natural gas) as feedstock, but they don’t produce gasoline and diesel fuel. Mr. Ameri may have meant that they could cut their petrochemical output and thus their intake from oil refineries, enabling an increase in gasoline output.

Even if this is what he meant, this may or may not be true, as most simple oil refineries cannot just flip a switch and overnight change the mix of their refined output; refineries are configured to produce certain mix of products and refine specific types of crude oil. It would appear that Iran could withstand an airtight embargo for about 100–480 days, depending on its ability to increase gasoline output by reducing petrochemical output. Again, the sufficiency of gasoline and diesel fuel in Iran would be further enhanced if it turns out to be difficult to maintain an airtight embargo for an extended period of time. Based on these considerations, it would appear that the regime in Tehran has built itself a reasonable cushion in preparation for a gasoline embargo.

While these may represent the prevailing supply-demand balance of gasoline and diesel fuel in Iran, there are important policy considerations that also can affect realities in Iran. The Iranian government long has realized that it should eliminate the fuel subsidy in order to reduce the growth in gasoline and diesel consumption, eliminate smuggling, improve air quality, increase oil exports, and above all improve the government’s budgetary position. Over the past ten years, the fuel policy has cost Iran in the range of 10 to 20 percent of GDP annually, depending on world prices and the government mandated pump price—an astounding figure. In need of additional revenues, the regime has wanted to eliminate this subsidy by increasing the price at the pump to world levels, but the government has been paralyzed because of the specter of a domestic backlash. It has managed only marginal price increases and adopted a rationing scheme that has slowed down the rate of growth in demand.

While talk of an embargo by politicians is cheap, an effective gasoline embargo can only be implemented through a naval blockade of Iran. Such a blockade would require UN Security Council approval. Mindful of Russian and Chinese ties to Iran, this would be a lengthy and tortuous process, and approval would be by no means certain. An embargo without the UN Security Council would be considered an act of war, and Iran already has declared that it would be met with force and the potential closing of the Strait of Hormuz.

Even assuming that a gasoline embargo were effective in cutting off Iran’s imports, what would happen? Consumption of gasoline would decline by 30 percent. If the government allowed the reduced supply of gasoline, namely, domestically refined gasoline, to be sold at a price that would equate demand to supply, the price would increase to a level that would eliminate the subsidy, meaning no subsidy for imported gasoline and no subsidy for domestically refined gasoline. There would be no incentive to smuggle gasoline to neighboring countries. The government would have higher revenues to spend on other priorities and projects. Low and behold, the sanctions would have done what Tehran has wanted to do for years, and the government would not be held responsible.

What does all this mean? Is a gasoline (and diesel fuel) embargo the mother of all sanctions? Will it cripple the Iranian economy and encourage the population at large to rise up and overthrow the regime?

Based on the above, I would conclude that:

1. An airtight gasoline embargo is difficult to implement, as Iran’s borders are long and porous.
2. China is unlikely to sign on at the United Nations without extracting too high a price from the United States.
3. Even if China does acquiesce, UN negotiations are likely to be long and painful.
4. Iran clearly is expanding its refining capacity, increasing its storage of gasoline (and diesel), preparing to reconfigure its refineries to produce a little more gasoline, preparing the ground to reduce gasoline smuggling, and in the event of an embargo would allow prices to increase, at least somewhat. All of these measures would blunt the impact of a gasoline embargo.
5. An embargo would be blamed on the United States, while shoring up government finances.

The most puzzling question has been why there is so much talk of a gasoline sanction and other unnamed crippling sanctions when financial sanctions, which could deal a mortal blow to the Iranian regime itself, are soft peddled? Some say that the Obama Administration wants to hurt the regime, but not the opposition, so it is treading carefully to find the smartest sanction. I beg to differ. The concern for the impact of sanctions on the opposition is a smoke screen. There are financial sanctions that would have little negative impact on average Iranians while raising havoc for regime insiders and their business partners. Yet we don’t talk of these, much less take action. To my mind, the likely answer is that, at least for now, President Obama still wants to cut a deal with Iran and the IRGC and is not prepared to embark on a road that could lead to confrontation. He wants to appear tough but not be tough. The gasoline sanction is only a smoke screen to buy more time, while Iran becomes less and less dependent on imported fuels and continues to trample on the human and legal rights of its citizens.

Even this puzzle was recently answered in a statement on February 25 as reported by Reuters: “It is not our intent to have crippling sanctions that have . . . a significant impact on the Iranian people,” State Department spokesman P. J. Crowley told reporters. “Our actual intent is . . . to find ways to pressure the government while protecting the people.” It would, therefore, appear that we will continue to talk tough and pretend that we are pressuring the Tehran regime and supporting the suffering people of Iran.

Hossein Askari is Iran Professor of International Business and International Affairs at the George Washington University. During the mid 1980s he was director of a team of international energy experts contracted to design an energy plan and energy planning capabilities for Saudi Arabia.