Gasoline Rationing Plan in Iran: A Symptomatic Solution
Hossein Rahdari
Graduate School of Management and Economics
Sharif University of Technology
rahdari@ gsme.sharif.edu
Cell phone: +98-912-294 40 80
MohammadA min Zargarzadeh
Graduate School of Management and Economics
Sharif University of Technology
a_zargarzadeh@ yahoo.com
Hamed Nozari
University of Tehran
hanozari@ yahoo.com
Leila Soltani
Industrial Engineering Department
Sharif University of Technology
leilasol17@ gmail.com
Abstract
Iran is a resource-based country and these resources have brought advantages and
disadvantages to the country. It seems that disadvantages are results of mismanagement of
the resources and not the existence of resources. Fuel subsidy is an example of such
mismanagements. While fuel subsidies are common in the Middle East, the oil-richest place
of the world, Iranian domestic fuel prices are among the lowest in the world. The low fuel
prices population growth, and urbanization growth have caused growth of fuel consumption
and consequently growth of subsidies. Since nothing can grow forever, two years ago the
government had to start a rationing plan to reduce the growth of fuel consumption due to
budget and gasoline stock limitations.
In this paper we will model dynamics of the problem and answer why the government
had to execute the rationing plan. Furthermore; we try to show that this solution is not a
fundamental one. It is a symptomatic solution in which the ration of each car will decrease
after a while. In the end, we offer two policies to limit the demand naturally, not by force of
rationing plan, and try to offer a fundamental solution to manage the fuel consumption.
1- Introduction
Tran is among the countries rich in natural resources especially crude oil and natural
gas. It has the third largest oil reserves and also the second largest natural gas reserves in the
world after Russia. These rich natural resources have brought both advantages and
disadvantages to Iran. [1] (For a related discussion see [2]) The most important advantage is
development of energy-consuming industries with high profit margin due to availability of
inexpensive energy factors. As a matter of fact, the inexpensive energy is an important
competitive advantage of domestic producers over their global competitors.
On the other hand, the most important disadvantage of these natural resources is again
the low prices of energy factors especially gasoline. Every year, tens of billions of dollars are
spent to import the required gasoline to meet the unnaturally huge demand of motorists.
Although this money could have been spent on improvement of welfare of the society, it has
caused huge budget deficit over past decades and undermined the welfare and even industrial
progress of the country.
Iran's history is full of endless struggles over the increase of fuel price. Actually over
the time, politicians have understood that reduction or stabilization of fuel price is a source of
popularity for them. For instance, in 2004, Iran's parliament passed a law called "Stabilization
of Prices". The law forced government to stabilize prices of some products including fuel,
natural gas, electricity, and drinking water that were considered key factors in determination
of inflation. Head of Iran's parliament called this law "the gift of parliament to the nation" at
the time.
Fig.s 1 and 2 show the nominal and real prices of gasoline in Iran respectively.
Fig. 1: Gasoline Nominal Price in Iran in the past 15 years
120
100
80
60
—®— Gasoline Nominal Price
(Toman/Liter)
40
20
ie) T T T T T T T T T T T T T 7
i oo SA o “a o No
PEPE SS SS KP POF SS
SM oS” oo y SE PH GM MI Rd
Re OR RR A ee a as a a ee
Source: Iranian National Oil Company (1 Cent$=10 Taman)
Fig. 2: Gasoline real price with base year of 1983-1984
100 ~
40 == Gasoline Real Price
with base year of...
Source: Central Bank of Iran
As shown in Fig. 2, the so-called "parliament gift" decreased the real price of gasoline
and eventually decreased the investment in this section and boosted importation because the
domestic producers were not able to meet the growth of demand. [3]
To have a better picture of low gasoline price in Iran, Fig. 3 shows a comparison
between gasoline price in Iran and USA in 2008.
Fig. 3: Gasoline Price in Iran and USA in 2008 (Cent/G allon)
350 \
300 =
250 —¢—Retail Gasoline Prices in Iran in
Cent/Gallon
200
Retail Gasoline Prices by All
150 Users in USA in Cent/Gallon
100
50
0
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Source: Energy Information Administration (EIA)
Fig. 3 also shows another policy of Iran's government in pricing the gasoline: Fixed
price policy over a year. Although the price of oil-related products such as gasoline, natural
gas and electricity will naturally increase by a rise in oil price, Iran's government fixed the
price of these products, even if the global prices doubled or tripled! Especially when the oil
price rises, this policy has negative effects on the economy of Iran. On the other hand, when
the oil price rises, the revenue of the government will rise too, but a part of this revenue is to
be spent on importation of gasoline which is sold in domestic market with a price much lower
than the global price. Thus it is not odd that the rise of oil income does not have the expected
effect on improvement of welfare of the society of Iran. [4]
So what is the benefit of subsidies? These subsidies are a form of welfare payment that
reduces the cost of living, but on the other hand, subsidies have reduced the profitability of
most of industries in Iran and consequently the growth of GDP and the standard of living.
The largest subsidy payment of Iran's government is on fuel, especially gasoline.
In 2008, the gasoline price was $0.1 per liter and the cost of producing a liter of
gasoline in domestic refineries was estimated $0.22, implying a subsidy of 54 percent. The
average import price was $0.48, implying a subsidy of 58 percent. [5] But the question is
"why does the country having the third proved oil reserves of the world need to import
gasoline?" The answer is wrong policies of policy makers who reduced the real price of
gasoline over the past years (See Fig. 2) and made the industry unattractive for investors. The
aftermath of those policies is that refineries are inadequate both qualitatively and
quantitatively. At present, Iran having huge oil reserves, has to import gasoline due to
reduced production capacity of it's nine oil refineries, most of which were built before the
1979 revolution.
Maybe the amount of importation and subsidies was not huge in the past, but with
growth of population and urbanization, the demand for energy factors has reached to an
uncontrollable point. For instance, in 2005, gasoline import subsidies cost $2.1 billion (1.3
percent of GDP) but in 2006, they were estimated to be $4.4 billion (2.3 percent of GDP).
The rapid rise of these costs could not be bore, so the government announced that Iran
would stop importing petrol in June 2006 and would begin fuel rationing. This policy was
actually preferred to rising prices policy.
The gasoline issue is best modeled by what Peter Senge proposed in "Fifth Discipline".
[6] There is a problem and you have two solutions. One is simple and immediate,
“symptomatic solution", the other one, "fundamental solution", is hard and time-consuming.
Although the symptomatic solution is fascinating to policy makers, it has some side effects
that gradually worsen the problem. Fig. 4 shows the model.
Fig. 4: "Symptomatic" and "Fundamental" solutions
Symptomatic
Solution
fe
ae
Problem Sympt:
01
Ss
+
Fundamental
Solution
m
\
e
Sa Side Effects
If the gasoline issue is modeled as shown in Fig. 4, we will have the model in Fig. 5.
Fig. 5: A simple model for G asoline issue based on the model of Fig. 4
Low gasoline
prices
{ |
Angry nation! ee Investment
fr >) attractiveness
GDP
" oyo
Industrialization of
the country
~~ +
Tnvestment
Politicians have selected the simpler way to make the nation happy. They could have
invested the money in industrializing the country and therefore increasing GDP. But they
have selected the simpler policy over the past decades leading to reduction of investment in
new refineries which will have negative effects on the nation's standard of living. people
,using inexpensive fuels, are happy in the short-term but they will be unsatisfied in the long-
term because of the rationing plans and unavailability of the desired amount of gasoline.
With a brief description of the gasoline issue in Iran, we are now ready to define and
model the problem. In the end, we will try to offer some solutions too, of course fundamental
solutions.
2- Problem Definition
During the last few years, the rate of car production grew in Iran. with production of
370,000 cars in 2002, automakers reached the production of almost 930,000 cars in 2007. The
number of all cars in use from 1999 to 2009 and their daily and yearly consumptions are
shown in table 1.
Figures 6, 7, and 8 respectively show number of cars, gasoline consumption per car, and
daily gasoline consumption in Iran.
Table 1- Number of cars, total daily and per car fuel consumption
Yearly Gasoline
Daily Gasoline
Number of cars Total Casi Consumption per Consumption per
consumption (m*) Car (m3) Car (Liter)
1999-2000 2,945,572 11,779,302 4.0 11.0
2000-2001 3,142,572 12,242,441 3.9 10.7
2001-2002 3,389,118 13,320,996 3.9 10.8
2002-2003 3,712,964 14,267,902 3.8 10.5
2003-2004 4,178,678 15,596,651 3.7 10.2
2004-2005 4,841,653 17,217,408 3.6 9.7
2005-2006 5,601,695 18,541,784 3.3 91
2006-2007 6,419,116 20,508,959 312 8.8
2007-2008 7,335,947 22,421,991 3.1 8.4
2008-2009 7,551,120 18,720,384 24 6.2
Source: Iranian Fuel Conservation Company
Fig. 6: The number of cars in use during the study periods
8,000,000
7,000,000 pot
6,000,000 TA
5,000,000 PA
4,000,000
3,000,000 ——Number of Cars
2,000,000
1,000,000
i) T ,
yb S$ © Sd @
FF PF FF SF SF WF oS
SSS MK FNM
PP SL LS PT LS FT KF
Fig. 7: Yearly and daily consumption of each car during the study periods
12
—® Yearly consumption per car in
cubic meter
= daily consumption per car in
liter
Fig. 8: Total Daily Gasoline C onsumption (Thousand Liter)
=Total Daily Gasoline
20000 Consumption in Thousand
Liter
The table 1 shows that the number of cars is rising. However, the trend of daily and per
car consumption has decreased for the studied period. Maybe the reasons are technology
improvement of automakers, increase of the dual-fuel system cars (CNG cars), improvement
of public transportation and also scrapping the old cars. Until two years ago this drop in
consumption per car was due to natural mechanisms that led to consumption reduction. But
the last year drop is due to gasoline rationing plan. With the rationing program, each car is
allowed to use a limited volume of low- priced gasoline (for example 100 liters/month).
In the following section, we will try to model the situation that led the country to
rationing plan and then we will examine the effects of different scenarios and policies.
3- Model Description
Important variables considered in this paper are: car and motorcycle production, car
importation and exportation, fuel smuggling, government’s budget for subsidizing fuel,
inventory capacity for gasoline, political resistance, population and the number of trips,
public transportation capacity and attractiveness, scrap rate, technology improvements and
finally the average gasoline consumption of each vehicle.
The whole model is shown in Fig. 9. The main parts of the model are:
1- Car and Motorcycle Stocks: Iran has two major car producers with production of
almost 900,000 cars a year; hence it is the first car producer in the Middle East. In Iran,
motorcycles are produced too.
Cars and motorcycles have their own average life. So after a delay, they are scrapped.
The stocks of cars and motorcycles also have another input that is import. Actually there was
no import since two years ago when Iran started to import cars with tariff of 100%! In order
to support domestic industries, the import of cars was forbidden for about 10 years. Another
output is export that has been active since about three years ago when Iran's market almost
reached the saturation point. Fig. 10 shows these two stocks.
Fig. 10: Car and Motorcycle production stocks
CarExportRate oO MotorExportRate
/
ios)
Oo =
wrt
on mC) oN
Car Production Car Scrap : a we) Motors
fe)
Motor Production Motor Scrap
CPFune <The: er Import
MPFune Tine ctor ingore
2- The gasoline stock is the most important stock of the model. It shows the gasoline
available for consumption. Inputs are gasoline produced in domestic petrochemical plants and
also gasoline imported. Outputs are gasoline consumption and gasoline smuggling. Due to the
significant difference between the gasoline price in Iran and neighborhood countries,
smuggling was a very important dynamics. But after rationing plan and using Gasoline Smart
Card, Iran's government was successful to limit smuggling. Fig. 11 shows the gasoline stock.
Fig. 9: The model of Fuel Consumption in Iran
CarExportRate
‘xExport CarLife
G io]
OQ — | =
Car Production Car Scrap
Gov non-fuel
subsidy Expenses CPFune <Tirme> ‘ar Import Hirport
Pe lee Q. Gas Stock
aeny. Gas Production Gas Consumption
Gov I Loewe
row income Budget Limitation MotorExportRate Aiveciap Neig:
Price
k> GPFune <Time:
Stock Limitation Srauggling geal Price
al lotorExport fotorLife ie Per ter
a \ sna me OC
Motors
Motor Production Motor Scrap <
Plitical Resistance
MPFune =Tiree= tor Import Factor <Time>
Pricefunc
PoplIncrRate Car Makers a
Soceity Factor ulation> Total Trips
Population Political Party
PopChangeRate Factor PopTripQuefficient
<Discrepancy>
Tech Improvement
Factor
<Budget
Limitation>
Cars Average
Cons.
Gas limitation
Limitation>
Discrepancy
Public Transportation
Attractiveness Factor
Bus Per 1000
Tips Other Factors
Total Buses
BusFunc
<Time>
Fig. 11: Gasoline Stock
ise)
Hmport
a. Gas Stock =
Ges Production Gas Consumption
Average Neig.
Price
GPFue Time
Spjpl Staugeling
g Norninal Price
3- Gasoline consumption is a function of number of cars and motorcycles and their
average consumption. (Fig. 12) The average consumption is a function of the discrepancy
between real and nominal gasoline prices, total trips and Public Transportation A ttractiveness
Factor, and technology improvement. The rules of relationship are as below:
1- The more the Discrepancy (the cheaper the gasoline compared to its real price), the
more the consumption and the less the technological improvement.
2- The more the Total Trip, The more the average consumption.
3- The more the Public Transportation Attractiveness Factor, The less the Average
Consumption.
4- The more the improvement of technology, the less the average gasoline
consumption.
Fig. 12: Average consumption of vehicles dynamics
Discrepancy
‘Tech Imaprovernent
Factor
Ges limitation
Gas Consumption
Nominal Price
Public Transportation
Attractiveness Factor
What makes the discrepancy between the real price and nominal price? There are three
sources of political resistance over the price increase.
Over the time, Iranians have believed that while Iran has the third proved oil reserves of
the world; it is their right to consume low price fuel! This belief, Society Factor of
Resistance, has created a source of popularity for politicians too! As a matter of fact, if any
politician tries to increase the gasoline price, he may lose his popularity. So politicians try to
keep prices as low as possible.
Another source of resistance comes from car manufacturers! Any price increase will
affect the demand for personal cars especially when the average gasoline consumption of cars
is high. Fig. 13 shows the dynamics related to political resistance.
Fig. 13: Political Resistance dynamics
Norninal Price
litical resistance ame
Pricefune
Car Makers factor
Soceity Factor Political Party
Factor
And finally "what makes the Public Transportation Attractiveness Factor?" The model
we offered is shown in Fig. 14.
Fig. 14: Public transportation attractiveness dynamics
Public Transportation
Attractiveness Factor
Bus Per 1000
Tips Other Factors
=Population>
otal Trips wg 0 BusFune
PopTripQuefficient_ Total Buses
Time
The total trips is a function of population and if the Buses per 1000 Trips are attractive
enough, people are more eager to use public transportation, and subsequently the "Public
Transportation attractiveness factor" will also be higher.
And the last part (Fig. 15) is the Limitation part. The resources, budget ,and gasoline
reserves are limited and can't grow for ever as consumption grows. So the dynamics of
limitations restrict the average consumption of each car. We will see in results of the model
that these limitations led the country to execute the "Rationing Plan".
Having this model in mind, we are ready to simulate different scenarios and policies.
Fig. 15: Limitations dynamics
Gov non-fuel
subsidy Expenses
‘Subside Per Liter
Budget of Fuel
subsidy <<
i“
Gov Income Budget Litnitation
/ SP Stock Linnitation
eo “Gas limitation
4- Simulation And Results
Two different scenarios are considered for simulation:
1- In the first scenario, the gasoline price is constant but the real price rises leading to a
larger discrepancy between nominal and real prices.
2- In the second scenario, the model undergoes the gasoline rationing plan as a solution
and results are examined.
4-1: First Scenario Simulation and Results
This scenario was conducted with assumptions below:
1- After t=30 the real price rises but nominal price remains constant. It means that the
discrepancy is rising so it is obvious that consumption will rise too.
2- Because government spends substantially on subsidies, little money is left for public
transportation improvement and extension of new plants (investment). So we ignore
the effects of public transportation improvement and also assume that the gasoline
production is constant over the period of simulation. Finally because the nominal
price is below the real price, auto makers don't find it necessary to improve their
technology. Hence, technology improvement is assumed to be constant too.
The results are shown in the figures 16 and 17.
Fig. 16: First Scenario Simulation and Results
co 5 1 15 2 25 30 35 40 45 50 55 6) 65) 7006756 BO 8S) 8D (8S «100
‘Time Qifonth)
"Cars Average Cons." Scenano #1
Gas Consumption: Scenario #1
"Motors Average Cons." : Scenatio #1
Fig. 17: First Scenario Simulation and Results
6M
om
40,000
45M
107.5M
30,000
3M
105M
20,000
15M
102.5M
10,000
°
100M.
0
0 5 i 15 20 2 30 35 40 45 50 55 60 65 70 75 «80 BS 9D 95 (100
Tune: Qdfoatt)
‘Budget Limitation : Scenano #1
Gas Stock : Scenario #1
Stock Limitation : Scenario #1
4-2: Second Scenario Simulation and Results
In this scenario we execute rationing plan because we know that in the near future there
will not be enough gasoline available to use. Before this to hapen, we manage the
consumption using rationing plan. For example in t=70 all vehicles are forced to reduce their
consumption to a lower level. The result of this scenario is shown in the Fig. 18.
Fig. 18: Second Scenario Simulation and Results
0 10 20 30 40 50 60 70 80 Ea 100 110 120 130
"Cars Average Cons." Scenario #2
Gas Consumption “Scenario #2
“Motors Average Cons." Scenerio #2
As figure shows with limiting the demand but assuming other factors constant, we were
successful to postpone the gasoline shortage but again we will encounter the gasoline
shortage (at a time between t=110 and t=120 in the figure). At this point the title of the paper
seems reasonable because we faced lack of enough gasoline even with executing rationing
plan. Actually, with rationing plan the goverment has used a symptomatic solution and not a
fundamental one. This scenario and its prediction are what happened in the real world in Iran.
In fact after a year of implementing the rationing plan with 120 liter/month, limitations show
themselves and ration of each car is reduced to 100 liter/month by the government.
All the results above lead us to find a fundamental solution. So policies aimed to offer such
solutions.
5-Policies
We will test two complementary policies to manage demand in a way that there should
be no need to rationing plan. Actually we want to reduce the demand naturally not by force.
Policies are:
1- If the gasoline price is increased to its real price without any change in other
parameters such as technology improvement and public transportation attractiveness.
This assumption is rational because in short run, those factors can't be improved.
2- If supplementary policies such as technology improvement, and public transportation
improvement are conducted. This policy is a long-term solution and actually it is a
package of continuous improvements.
5-1: First Policy Simulation and Results
As fig. 19 shows by reaching to real price, demand will decrease naturally and there is
no need to be concerned about limitations specially budget limitation for a long time. But as
car makers are producing day and night, the country will again encounter limitations of
gasoline stock after a while. By executing this policy, we just postponed the rationing plan.
Therefore this solution is not enough by itself and we need to have a policy in long-term and
improvements in other dynamics.
Fig. 19: First Policy Simulation and Results
19
40M
4
15
30M \
3.25
5
20M
25 ae
oa
Ae
25 K ign:
10M er
175 \ =
Ea
\ ape
ae
2 Ase | ae
1 ill
0 15° 30 45 «60 75 «80 105 120 135 150 165 180 195 210 225 240 255 270 285 300
‘Time (Month)
"Cars Average Cone." : Policy #1
Gas Consumption : Policy #1
"Motors Average Cons." : Policy #1
5-2: Second Policy Simulation and Results
As we saw in policy number 1, real price is not a long-term solution. If we want to find
a better solution we should offer a package of continuous improvements in other important
factors and not just a change in price. Actually we should improve our technology, improve
public transportation, decrease the average life of vehicles, increase exportation of cars, and
extend the capacity of petrochemical plants.
This would definitely be a far better solution compared to policy 1 suffering from lack
of enough gasoline and budget. So if we cut the subsidy, there will be enough money
available to construct new plants, to do R&D to improve technology, and also to improve
public transportation.
Policy 2 is a package of all these improvements. As the fig. 20 and 21 show there
would be no need to reduce demand with rationing plan.
Fig. 20: Second Policy Simulation and Results
Q “yt
0 Sale
0 50 100 150 200 250 300 350 400 450 500 550 600 650 700 750 800 850 900 950 1000
Tune (Month)
"Cars Average Cons." Policy #2
Gas Consumption : Policy #2
"Motors Average Cons.": Policy #2
6-Conclusion
Iran's unnatural gasoline consumption is considered to be the result of many dynamics.
Rationing plan is not the fundamental solution in that by growth of cars _, inability of
petrochemical plants ,and also public transportation, the rationing plan should tighten again.
This is what exactly happened in Iran after 2 years.
Increasing the gasoline price to its real price is a good policy but its effect alone is not
satisfactory enough. To solve the problem fundamentally, in order to avoid the rationing plan,
we should offer a package of improvements in gasoline production and public transportation
as well as price realization. The results of such policy seem to be more durable. But we
should notice if these solutions are not continuous, other dynamics especially car production
may make it necessary that the rationing plan be executed again.
Fig. 21: Second Policy Simulation and Results
300 ME {|
25
150M
ee
|
@ 50 100 150 200 250 300-350 400 450 500 550 600 650 700 750 800 850 900 950 1000
Time (Month)
Stock Limitation Policy #2
Budget Limitation: Poey #2
7-References
[1] Tabibian, M., 2008,"Resource curse or mismanagement of resources?" www.rastak.com
(In Farsi)
[2] Ahrend, R., 2005, "Sustaining growth in a resource-based economy", United Nations
Economic Commission for Europe, Switzerland
[3] Nili, M, 2009, "Economy of Iran in 2008", www.Rastak.com (In Farsi)
[4] Nili, M., 2008, "Government and economic growth in Iran", Ney Publication (In Farsi)
[5] Rivlin, P., 2006, "Iran's Energy Vulnerability", The Middle East Review of Intemational
Affairs, Volume 10, No. 4
[6] Senge, P., 1994, "The fifth discipline", Doubleday Dell Publishing Group
Supplementary References
[7] Sterman, J., 2000, "Business Dynamics, System thinking and modeling for a complex
world", McGraw-Hill
[8] Dave, K., 2007, "Gas subsidies and Iran", Energy Bulletin
[9] Amuzegar, J., 2007, "Iran’s New Energy Picture", Middle East Economic Survey, No. 5
Statistics References
1- Central Bank of Iran. www.cbi.ir
2- Iranian National Oil Company
3- British Petroleum, Statistical Review of World Energy, www.bp.com
4- United Nation, International Trade Statistics Y earbook
5- Energy Information Administration (EIA), www.eia.doe.gov
6- International Monetary Fund, www.imf.org
7-OPEC, www.opec.org
