Iran, etc: When the Gas Bills Come Due

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What Ahmadinejad dreams, now that he cannot afford to buy the acquiesence of his people with 38-cent gasoline, as he could when the Green Revolution wilted a year ago,

Governments that buy the affection of their people, like people who submit to extortion, find that the deal is not sustainable because the demand for money just keeps going up while the supply dwindles. This is the lesson being learned right now by every state government in America, and that will be driven home shortly to the federal government: you cannot buy people off — in this case by refusing to tax them — forever. For one thing, the cost prevents you from doing the things that government is supposed to do. And for another, the cost just keeps on going up until it breaks you. For a crystal clear illustration of where this road leads, consider the plight of Iran. (For the audio version click here: 0106 Iran etc: When the Gas Bills Come Due)

No one has accused the government of Mahmoud Ahmadinejad of competence or popularity, but it persists, and one of the major reasons has been the fact that it gives gasoline to its people for 38 cents a gallon. (If Sarah Palin promises to do this, she will beat Obama.) Similar Iranian government subsidies hold down the consumer cost of diesel fuel and natural gas.

Couple of problems. The cost of the energy largess has grown to hideous proportions — according to Ahmadinejad, $114 billion a year. (When people do not pay the true cost of a commodity, they use lots and lots of it.) This as the supply of gasoline and diesel fuel is being crimped — not by any problem with the supply of oil, in this case, Iran has plenty, but by economic sanctions imposed on the country by countries worried about its nuclear energy and/or weapons program. Turns out Iran never bothered to build refineries for gas when the money for crude was easy and plentiful, and when the long-term assurances of cheap gas for the people were made.

Iran has refineries, of course, but they are old and they have been doing other things. As the sanctions began to bite last year, Ahmadinejad ordered five of the largest plants to convert to gasoline. But their low-quality product contains many aromatics, which produce smog thick with particulates, and as the New York Times reports, burning the local gas has turned the air of Tehran and other Iranian cities to muck.

Then, three weeks ago, Ahmadinejad announced that the country could no longer afford the energy subsidies, and that gas would go from 38 cents to $1.44 per gallon. And that was for the ration of 16 gallons allowed for each car; anything more than that will now cost $2.64.

Thus far, all is quiet in Iran, thanks to the very visible presence everywhere of security forces in riot gear. But if students in England were inclined to riot when their tuition fees tripled, what will be the reaction of a nation of people when the full cost of a sudden quadrupling of their petroleum costs becomes apparent?

The question is without doubt troubling Ahmadinejad’s sleep. And he is not alone. In the same week that Iran took its action, China — which also subsidizes consumer gas prices — announced a steep increase in pump rices that must mesh nicely with its inability to keep the lights on over wide swaths of the country in some of the worst winter weather it has ever experienced. A week or so later, the president of Bolivia, Evo Morales, declared the end of a six-year-old subsidy for gasoline that was costing his government $380 million a year. Within a week, public reaction scared him so badly he rescinded the decree. So in the short term he will not face strikes or riots, but the bill will still come due.

Americans, of course, do not pay the full cost of gasoline either. Our government would never do anything as socialist as pay a direct subsidy, it simply pretends that the real costs — of dealing with air pollution, public health problems, and a replacement source of energy when the gas is gone — simply don’t exist. That’s the American way.

And the bill for that, too, is about to come due.