IRAN IS LOSING THE OIL WAR

The international media were competing to report the most dramatic news from Iran at the end of June. At least three people died in an arson attack on one of the city's petrol stations.  This was a response to the introduction of strict controls on the distribution of petrol by the authorities of the Islamic Republic of Iran. "From midnight on Wednesday the purchase of petrol in Iran will be restricted," state television reported on 26 June, quoting a statement from the Oil Ministry. This meant that the owners of petrol-fuelled cars would be able to buy only 100 litres of fuel per month in Iran, which has immense reserves of oil and gas. The new measures were announced just two hours before they were due to come into force. Huge queues formed at petrol stations across the city as drivers tried to stock up on petrol. That's when one of the petrol stations was burned down.

The head of parliament's energy commission, Kamal Daneshyar, had earlier said that "the programme to ration petrol will be introduced for three months", journalists reported. "After this, the volume of fuel saved and the advantages and drawbacks of the experiment will be reviewed," he added. "If the results are positive, the project will be continued." 

Many experts say today that the petrol restrictions were not all that unexpected. "Petrol reform" had been expected in Iran since 22 May. However, the government decided at that time just to introduce a 25 per cent increase for fuel; the petrol price in Iran still remained one of the lowest in the world - a little above 10 cents per litre. In early June the Iranian government introduced a ration card system for petrol purchases as another step to control the constantly growing demand for petrol. Only people who have a special individual smart card, which carries information about their car and how much fuel they have already bought, can fill their tanks at the capital's petrol stations.

A rationing system in a country with 10 per cent of the world's oil reserves did not come as a surprise to the well-informed. The BBC explained that although Iran has gigantic reserves of crude, it is short of refining capacity, hence it imports 40 per cent of the petrol used in the country: every day Iran requires 72m litres of petrol while it produces only 42m itself. The shortfall is made up by purchases from abroad, which is a heavy burden for taxpayers. Observers recall the experience of Saddam's Iraq which had a petrol shortage despite its huge oil reserves: even women of easy virtue were cheaper than petrol there.

Petrol in Iran is still subsidized: its retail price is five times below the market price. Such a state of affairs cannot go on forever. Analysts are now predicting a social explosion in the Islamic Republic, as the citizens of this oil-rich country are already used to cheap fuel. Moreover, petrol rationing will sooner or later lead to a black market, with all the attendant features well-known from the era of Soviet shortages, which will also have an understandable effect on the social situation.

The Iranian authorities are still pledging that they will not allow the creation of a "petrol grey market". Soon after the introduction of the new rules for petrol distribution, Iranian President Mahmoud Ahmadinejad said that he is not intending to increase the petrol quotas for private individuals and stressed that it would not be possible to buy more fuel at a higher price. After the introduction of rationing for subsidized petrol, which prompted disorder in the country, the Iranian authorities suggested allowing people to buy more fuel than the quota but at a market price, journalists report. However, the president said that this "will kill the economy".

"We cannot allow the liberalization of prices for petrol in the current conditions," the president told IRNA news agency. "The market must not set the price for fuel - this would be a fatal poison for the economy, as it would spark inflation."

For now, Tehran is counting on help from across the ocean. Venezuela has agreed to supply petrol to Iran, Venezuelan Energy Minister Rafael Ramirez said in an interview with Iranian newspaper Sharg. "Yes, the Iranian side asked us to sell petrol and we agreed," he said, but did not give any more details about the deal.

We can clearly see an extremely deep crisis in Iran's oil industry. Akbar Torkan, head of the Iranian state oil and gas company Pars, recently warned that if new sources of funding are not found in the near future, the production capacity of Iran's oil industry will fall by 5 per cent every year. Torkan said that European banks had recently introduced new restrictions on investment in the Iranian economy, but the Oil Ministry is trying to find ways round these obstacles. Torkan was probably referring to the international sanctions against Iran. He clearly knew what he was talking about.

In mid-June the USA made clear that they might introduce serious sanctions in the near future against oil companies that sign contracts to work oil fields in Iran. The BBC reported that, under the US law on sanctions against Iran, Washington can punish not only American but any other company whose volume of trade with Iran exceeds 20 million US dollars. Nicholas Burns, a senior official at the US State Department, told the BBC that the USA could fine or use other punitive measures against oil companies that sign contracts to exploit oil fields in Iran. "We told the major oil and gas firms about the law and our intention to apply it, if they overstep the mark," Nicholas Burns said.

International oil companies are actually facing a difficult choice: to work with Iran or the USA. Meanwhile, joint projects in third countries could come under threat.

Most observers considered Burns' statement evidence of Washington stepping up the economic pressure on Iran. Moreover, the warning from Washington comes at a time when several European energy giants, including Shell, Repsol and Total, are considering concluding billion-dollar contracts to exploit Iranian gas deposits. Chinese and Malaysian energy groups are also showing an interest in Iran. Experts also point out something else. The relevant law was passed in the USA quite a long time ago, but Washington has so far chosen to refrain from real sanctions against the oil companies. However, the situation has now changed: the US Congress, which is now controlled by the Democrats, is putting pressure on the Bush administration to get tough with companies cooperating with Iran. The current economic sanctions can be fully ascribed to the campaign to destabilize the situation in Iran without war, which was recently reported in the press.

For all its strident statements, the UN Security Council has not yet managed to introduce tangible sanctions against Iran. But against this backdrop, the USA's "national sanctions" could turn out to be far more effective than many expect, above all because of the enormous attraction of the US market and US investment for European companies. They might not be against grabbing a piece of the Iranian oil pie, but cannot allow themselves to forget its price. 

Subsequent events have shown that this is not the limit of the USA's financial pressure on Iran. "What we're trying to do is make it difficult for Iran to use the global financial system to pursue illicit conduct," Stuart Levey, US deputy finance minister with responsibility for terrorism and financial intelligence, told BBC journalists. Of course, official financial sanctions, agreed with the UN, are in operation against Iran today. But they are already toothless - compromise had to be reached with Tehran's friends, first of all Moscow, in order for them to be adopted. As a result, the ban on operations with a small number of Iranian banks, companies and individuals who are thought by the world community to be taking part in work on the nuclear programme or supporting terrorism, is not having any real effect on Iran. But there is also a second, potentially more powerful, element at the USA's disposal. The BBC reports, "Since September 2006, US officials have been travelling the world talking to banks and company bosses. They aim to persuade business to voluntarily abandon or scale back all dealings with Iran." The BBC went on to give Stuart Levey's assessment: "There is significant evidence that it's working in the sense that Iranian business is being subjected to greater scrutiny and it's more difficult for them to operate," he says. "A number of major financial institutions have cut off doing business with certain Iranian banks or with Iran entirely." Basically, major international business is facing a tricky problem: if you don't want any problems with Washington, don't do business with Iran. As a result, major banks have become reluctant to issue letters of credit on Iranian trade. Consequently, Iranian companies often find themselves unable to carry out transactions in dollars, still the most important currency for world trade. 

Against this backdrop there is no doubt that the current problems in the Iranian economy can be described as a defeat in the oil war that Iran itself declared on the USA at the start of the year.

At that time the media were full of reports about an imminent "oil revolution" - Iran's decision to open its own oil exchange on the island of Kish where oil and oil products would be traded for euros, not dollars.

Everything looked fine at first: the opening of the new exchange was set for the first day of the New Year according to the "Muslim solar calendar" used in Iran. After this, many observers were convinced that a revolution would occur not only on the world oil market but in the global economy as a whole. 

Iranian market experts were sure that interest in the new exchange would beat all conceivable records and give Iran a completely new position in the world economy. Tehran did not think to hide the fact that the new exchange was not so much an attempt to improve the economic situation at home, as a destructive "economic weapon" against the USA. Many believed that the attack would be a success. The French research agency Laboratoire Europeen d'Anticipation Politique - Europe 2020 also made a prediction: the start of the Iranian oil exchange would be "the end of the monopoly of the dollar on the global oil market. The result will probably be a revolution on the international currency market", as other oil producers might begin to sell their output for euros. To put it simply, many states would no longer need dollars and would dump them on the market which would inevitably devalue the American currency. These predictions were quoted in the media in many countries, especially in Russia, where they were predicting that the American economy would default at the same time.

To the disappointment of many, the Iranian Oil Ministry announced on 20 March that the opening of the exchange was being delayed. The opening was postponed until June, then put off again and now has been conveniently forgotten. Now that it has emerged without the help of malevolent "Crusaders" that Iran is not able to provide its own fuel, its previous exchange pretensions look almost laughable.