Why Iran Is Driving Oil Up

But it's a dangerous game, longer-term. Iran's oil industry--hampered by years of mismanagement and U.S. sanctions--is a mess; the country hasn't been able to make its OPEC quota since last year, and its refineries are so inadequate that it has to import almost half the gasoline it uses. Rather than reinvesting oil revenues in new production capacity, Iran's government (like the corrupt elites of other oil-rich countries) prefers to pay off the public with big subsidies for political gain. Thus gas prices are subsidized so Iranians pay only about 10 cents a liter, which people use (or misuse) as they like. At a service station on Tehran's Pakistan Street, customer Farid Eshaghi slops about half a liter of gasoline onto the ground while filling up his tank. "Why should I be worried about wasting gas when we have so much oil in our country?" he asks.

With Iran awash in money, economist Saied Laylaz notes, the country's spending of foreign exchange has gone up from $20 billion in 1997 to $50 billion this year. There's less control over corruption, which was already rampant: government auditors used to scrutinize any transaction over $10 million, says Laylaz; now the limit is $50 million. Domestic manufactures have declined as foreign imports have increased. Privatization has essentially come to a halt as the government finds it politically convenient to throw good money after bad to subsidize decrepit national industries. And worst of all, in the view of many Iranian liberals, Ahmadinejad has bought off much of the public, stifling dissent and frustrating democracy.

A drop in oil prices could very quickly become the regime's greatest weakness. "If there's a decrease to lower than $40 a barrel," says Laylaz, "that would create chaos in the Iranian economy." But for now, the job of talking them up is easy, thanks to all the troubles in the region. And Shahpour Madani is happy to thank Iran's president for the money with which, finally, he decides to buy his wife that new fridge. "To tell you the truth, I didn't vote for Mr. Ahmadinejad," says Madani. "But it seems that he is the first president who thinks about the well-being of the people." Of course, many an addict thinks his dealer cares about him, too.

© 2006