Gasoline Sanctions on Iran: How Will Tehran Respond?

Congress is currently considering unprecedented sanctions targeting Iran’s refined petroleum sector, particularly gasoline. Any sanctions policy must be based on an estimate of its likely effects in Iran, and must account for the fact that some international actors will attempt to skirt the sanctions for profit or political reasons.   Iran’s leadership has long been aware of its vulnerability to gasoline sanctions and has consequently developed a three-pronged plan to survive them: decreasing domestic consumption, seeking alternative international gasoline supply sources, and increasing domestic refinery production. This strategy could potentially undermine the effectiveness of sanctions severely.  The reduction of internal gasoline subsidies will likely reduce consumption significantly.  Venezuela, China, Central Asia, and black market sources could help Iran compensate for gasoline shortages.  And an expanded Iranian gasoline refining capacity could dramatically reduce Iran’s need for gasoline imports within a few years. Sanctions could, however, generate significant short-term political instability, as any government reduction in gasoline subsidies – Iran’s most likely policy move – would be highly unpopular domestically.  From the standpoint of affecting Iran’s behavior regarding the nuclear program, moreover, it matters less whether this strategy will actually mitigate the effects of sanctions than whether the Iranian regime believes that it will.

I.  Introduction

II. Iran Sanctions Legislation Details

III. Current Iranian Gasoline Market

IV. Reducing Iran’s Domestic Gasoline Consumption

V. Alternative International Gasoline Supply Sources

VI. Increasing Iran’s Domestic Gasoline Refining Capacity

VII. Domestic Political Implications for Iran

VIII. Policy Conclusions

The latest revelation of a previously undisclosed Iranian uranium enrichment site has heightened international concerns and led to burgeoning support for harsher sanctions against Iran. At the Pittsburgh G-20 summit on Friday, September 25, President Obama condemned Iran for engaging in “covert” activities and “breaking rules that all nations must follow.”[1]

In his recent weekly address, President Obama laid out  two choices for Iranian officials ahead of Thursday’s meeting between officials from the P5+1 and Iran: “live up to their responsibilities and achieve integration with the community of nations” or “face increased pressure and isolation.”[2] The president recently alluded to one avenue for potential pressure on the Iranian regime – “sanctions that have bite” – and earlier this year, Secretary of State Hillary Clinton stated that the administration was “laying the groundwork for the kind of very tough...crippling sanctions that might be necessary in the event that our offers [of engagement with Iran] are either rejected or the process is inconclusive or unsuccessful.”[3]

One of the leading sanctions options targets Iran’s refined petroleum imports and the development of its domestic petroleum refining industry. Two bills have been introduced in the House and Senate to incorporate these targets within existing economic sanctions legislation: the Iran Refined Petroleum Sanctions Act of 2009, H.R. 2194, and its Senate counterpart S.908. H.R. 2194 and S.908 currently have 317 and 75 sponsors in the House and Senate, respectively.[4] The bipartisan legislation expands upon the Iran Sanctions Act of 1996 to include sanctioning firms involved in exporting, transporting, financing, or insuring gasoline and refined petroleum exports to Iran as well as firms involved in developing Iran’s domestic refining capacity.[5] The primary sponsor of H.R. 2194, Congressman Howard Berman (D-CA), stated this month that he would likely initiate the process of reporting his bill to the House floor in October in order to deliver the legislation to the president by early 2010.[6] 

While U.S. lawmakers are working to strengthen sanctions against Iran, Iranian officials are already attempting to minimize their potential impact. On Tuesday, September 15, during the inauguration ceremony of the new oil minister, Masoud Mir Kazemi, President Ahmadinejad stated that sanctions against Iranian gasoline imports are “impossible.”[7] He claimed that Iran is able to circumvent sanctions, calling on the new oil minister to finish projects designed to meet domestic energy requirements.[8]

This statement is not merely bluster. Iran has spent the past two years developing a comprehensive plan to skirt strengthened sanctions. The plan follows a three-pronged approach that seeks to reduce domestic gasoline consumption, secure alternative gasoline import sources, and increase domestically refined gasoline. The first two efforts are short-term strategies to mitigate the impact of sanctions until Iran becomes self-sufficient in refined products. The Iranian strategy appears likely to aim at seeking to survive a couple of hard years while developing the indigenous capacity to make sanctions irrelevant.  Such a strategy coheres with Iran’s approach to all previous sanctions—the attempt to develop an autonomous Iranian internet, the heavy emphasis on domestic production of military equipment, and, of course, the insistence on an entirely indigenous full nuclear fuel cycle.

Provisions

H.R. 2194 and S.908 expand the existing Iran Sanctions Act of 1996 (ISA), which includes provisions for sanctions on individuals or firms investing in Iran’s energy industries and transferring WMD technology or “destabilizing numbers and types” of advanced conventional weapons to Iran.[9] The key additions in H.R. 2194 and S.908 broaden sanction targets to include persons and firms that: (1) make a minimum investment of $20 million to improve Iran’s ability to develop and refine its petroleum resources, (2) sell, lease, or provide material support or resources that assist Iran in maintaining or enhancing its domestic production of refined petroleum, and (3) export refined petroleum to Iran or provide shipping, insurance, or financing to facilitate such exports.[10] The bills would also introduce new penalty options for sanction targets, including bans on foreign exchange, banking and property transactions involving sanctions targets.  These options would build upon existing penalty options available under the ISA, including bans on receiving assistance from the Export-Import Bank, U.S. exports of military-related goods and technology, loans of more than $10 million annually from U.S. financial institutions, designation as a primary dealer of U.S. government bonds, U.S. government contracts, or unrestricted export authority to the U.S.[11]

H.R. 2194 and S.908 revise the existing ISA. First, the new measures reduce the threshold for sanctionable investment activity from $40 million to $20 million, allowing for the targeting of more petroleum-related investment in Iran.  The legislation, however, retains a condition whereby persons who invest above the $20 million threshold total in one year, but in combinations of multiple investments of less than a quarter of the total threshold each – $5 million in the case of H.R. 2194 and S.908 – are not subject to sanctions. The bill also maintains presidential waiver authorities, adding in the case of H.R. 2194 a provision that does not require the president to apply sanctions for any targeted persons that are citizens or residents of a nation participating in the Proliferation Security Initiative (PSI).[12] The general waiver authority in H.R. 2194 allows the president to forego sanctions in instances where doing so would be vital to the national security interest of the U.S.

Implementation of Existing Sanctions  

The original intent of ISA was to counter Iran’s development of WMD and support for terrorism by denying Iran economic resources through the targeting of Iran’s energy industries. The ISA, given the current behavior of the Iranian regime, has fallen short of achieving the main goal of the 1996 legislation. In April 2009, the U.S. State Department released its annual report on global terrorism for 2008, noting that Iran remains “the most significant state sponsor of terrorism.”[13] Iran also continues to develop its nuclear capabilities, specifically its enrichment program, which continues in defiance of Iran’s nonproliferation obligations and raises serious concerns regarding a potential weapons dimension, according to the International Atomic Energy Agency (IAEA).[14]

The ISA’s ability to significantly impact Iran’s economic vulnerabilities remains debatable. The broad impact of sanctions like ISA, while producing limited strains, has largely failed in achieving “economic containment of Iran” according to one analyst of sanctions regimes.[15] A 2007 Government Accountability Office (GAO) report requested by the House Committee on Government Oversight, further, notes that sanctions were not once imposed under the ISA between 2003 and 2007, a period during which Iranian entities signed $20 billion worth of contracts toward the development of its energy resources.[16] The GAO report, which reviewed the implementation, impact and factors limiting U.S. sanctions, also provided key insights into the contingencies related to the implementation of gasoline related sanctions.[17]

In 1998, the U.S. considered sanctioning France’s Total, Malaysia’s Petronas, and Russia’s Gazprom for investments in Iranian gas fields, but ultimately granted the three firms a waiver based on the Clinton administration’s determination that it would disrupt efforts to build “an effective multilateral regime” and European Union (EU) concerns about the “extraterritorial application of U.S. law” that would result from sanctions.[18]  A State Department report cleared by the White House National Security Council at the time additionally noted that any penalties that could be imposed on the three firms were likely to be ineffective in persuading the companies to forego investments in Iran because they were “insulated from any practical negative impact.”[19]

Some firms such as India’s Reliance and Europe’s BP have reportedly scaled back or ceased their exports of refined petroleum to Iran altogether in the current environment of pending legislation. But Chinese firms, perhaps less vulnerable to potential sanctions penalties, have at least partially filled that vacuum, as detailed below.[20]

As of June 2009, Iran consumed 408,385 barrels of gasoline per day.[21] One analyst expects this to increase to 415,000 barrels per day in 2010 and 512,000 barrels per day in 2015.[22] Of this figure, Iran currently imports roughly 120,000 - 128,000 barrels of gasoline per day.[23]

These imports originate from many sources: as of July 2007, Iran imported gasoline from a reported sixteen countries, including India, the Netherlands, France, and the UAE.[24] As of September 2009, China exported roughly 30,000-40,000 barrels of gasoline per day to Iran, according to an estimate by JP Morgan’s head of commodities research; another source confirmed that China provides a “third” of Iran’s refined petroleum needs.[25] The Indian company Reliance delivered roughly 39,150 barrels per day in May 2009, although it has reportedly sent no gasoline shipments to Iran since then.[26] In September 2007, the Dutch-Swiss firm Vitol provided Iran with approximately 50,340 barrels of gas per day, and a May 2006 report confirms Vitol’s role as an Iranian gasoline market leader, stating that Vitol handled fully 60 percent of Iran’s gasoline imports at the time.[27] Although Vitol may have decreased its involvement in the Iranian gasoline market since 2007, it and Reliance, along with France’s Total, the UK-Netherlands’ Royal Shell, Switzerland’s Glencore, Switzerland’s Trafigura, and Malaysia’s Petronas remain some of the foremost foreign players in the Iranian market.[28] Total and Shell have reportedly already sold gasoline to Iran for October delivery.[29]

Sanctions would most directly affect Reliance and the European firms, resulting in a potential deficit of roughly 88,000 barrels – the non-Chinese-originated portion – of Iran’s 128,000 daily imported barrels of gasoline.[30] Records show that China does not provide gasoline directly to Iran; rather, Chinese gasoline makes its way to Singapore, where traders then resell it for delivery to the Iranian market.[31] Other foreign companies also use third-party ports and facilities, such as those in Jebel Ali and Fujairah in the United Arab Emirates, to process and ship gasoline products to Iran.[32]

This figure may overestimate the amount of Iranian exposure, however, as Iran has managed to maintain stable imports around 120,000-128,000 barrels this fall despite the halt in Reliance shipments and a reported cutoff in shipments from BP this spring.[33] Many gasoline traders have already priced in the increased risk of shipping gasoline to Iran, as many Western banks have reportedly been less willing to finance such operations.[34] Iran may also receive a significant amount of gasoline through other sources: Turkmenistan exported 15,447 barrels of gasoline per day in 2006, some of it to Iran, and Azerbaijan may provide some gasoline.[35] Due in part to the existence of these other sources, one analyst estimates that sanctions could only hope to cut 25-50 percent of Iran’s gasoline imports.[36] Assuming a worst-case scenario for Iran, however, this paper uses the figure of 80-90,000 barrels as the shortfall for which Iran would have to account.

Iran’s first sanction defense mechanism, reducing domestic consumption, would seek to reduce this gap on the demand side.

The Iranian government can reduce gasoline consumption through the following mechanisms: (1) increasing the price of subsidized and non-subsidized gasoline, (2) enforcing strict rationing quotas, (3) decreasing the amount of government subsidies, (4) developing alternative energy fuels, and (5) improving public transportation. Iran began implementing these measures under the fourth economic plan (2005 – 2009) and has achieved limited success thus far.

In an unprecedented 25 percent increase, the government raised subsidized gasoline prices to 10 cents per liter in May 2007. One month later, the government implemented a national rationing scheme limiting drivers to 100 liters per month.[37] Quota amounts have varied over time, ranging from 75 liters per month to a peak of 120 liters per month in July 2008. The quota is currently 100 liters per month at 10 cents per liter. As of March 2008, drivers can purchase gasoline above quota limits at a higher, “market” price of 40 cents per liter.[38]

Despite increased prices and stricter quotas, the government still spends nearly a third of its national budget on gasoline subsidies.[39] In 2008, Ahmadinejad attempted to reduce this financial burden by proposing an economic restructuring plan that would end government subsidies and give low-income Iranians a stipend of $70 a month instead.[40] The Iranian parliament did not pass this plan and subsidies remain in effect, although this issue is currently before the parliament again.

Although the government also subsidizes compressed natural gas (CNG), this alternative fuel is significantly cheaper than gasoline.  The current price of CNG is only 0.004 cents per liter, a fraction of the cost of subsidized gasoline.[41]  Given that Iran has the second largest natural gas reserves in the world, much of which remains untapped (less than 1 percent of Iran’s estimated natural gas reserves are currently developed), CNG is a viable alternative energy source.[42] As part of a national campaign to switch over to natural gas, Ahmadinejad passed a law in 2007 requiring carmakers to manufacture dual-use cars that can run on gasoline or natural gas. CNG now accounts for 10 percent of all transportation fuel usage, a figure expected to increase by 2010.[43] The government is currently expanding its fueling station infrastructure to keep pace with an increasing number of dual-use vehicles. According to the chief of transportation and management, Mohammad Royaniyan, “there should be 1,000 new single and double purpose stations to provide CNG by the end of the year.”[44]

In addition to alternative energy sources, the government has examined alternative means of transportation. In 2007, the Iranian parliament passed a public transportation bill designed to improve and expand subway, railway, and bus systems.[45] As an initial step, the bill designated a portion of foreign exchange reserve funds for the completion and modernization of Tehran’s subway system. As of July 2009, however, the head of Tehran’s Railway Company, Mohsen Hashemi, reported that the project was “four years behind schedule” due to lack of government financing. Out of the 12 million inhabitants in Tehran, only 1.5 million people per day use the subway in Tehran. Proper government financing for subway systems in major cities could increase this capacity and substantially reduce gasoline consumption.[46] 

Iran’s October Plan

The Iranian parliament is expected to approve additional measures to reduce domestic consumption in early October.[47] Although the current system will remain in place during the fall, the government plans to reduce gasoline quotas in the second half of the Iranian year, in addition to possibly raising the price of fuel. Under the new plan, quotas would be reduced from 100 to 80 liters per month at an increased cost of 40 cents per liter. The price of gasoline above the quota level would increase to 65 cents per liter.[48]

In addition to these measures, the parliament is currently reviewing Ahmadinejad’s subsidy elimination plan.[49] This plan lays out a “goal-oriented” or targeted approach to reducing government gasoline subsidies. The “goal-oriented” subsidy plan is based on the results of a nationwide survey that the government conducted last year. The government used the survey data to divide the Iranian people into ten distinct income groups in order to calculate the potential effects of decreasing government subsidy allocations. Ahmadinejad plans to soften the blow of increased gasoline prices by giving financial handouts to those in the two lowest income brackets. According to the spokesman of the parliament’s special commission, Kazem Delkhosh, 50 percent of the extra revenue generated from the implementation of this plan will go to social welfare projects such as health insurance, pension programs, and government handouts for the poor. This leaves approximately $17 billion in saved revenue that the regime can divert to other government projects.[50]

Iran could seek to address any deficit in supply wrought by sanctions by seeking alternate suppliers on the international market. While such suppliers would likely face increased costs and legal difficulties for doing business in Iran, the 80 – 90,000 barrels of gasoline per day consumption gap that Iran would seek to fill could result in huge revenues and potential Iranian gasoline market dominance for those willing to bear the risks.

Venezuela, China, Turkmenistan, international oil companies using third parties or shell companies and smuggling from neighbors such as Iraq are the most likely candidates for alternate international gasoline supply for Iran.

Current or Announced Suppliers:  Venezuela and China

On September 6, 2009, Venezuelan President Hugo Chavez announced that Venezuela would provide 20,000 gasoline barrels per day to Iran.[51] Venezuela made a similar announcement in July 2007, just after Iran introduced a program to ration gasoline consumption, although Caracas did not specify the quantity that it would export to Iran at the time. It is not clear whether the 2007 announcement resulted in an actual delivery of gasoline, although Venezuela has reportedly delivered gasoline shipments to Iran before.[52] Venezuela could have difficulty shipping the fuel to Iran by itself given the great geographic distance and might have to instead as an intermediary to buy fuel for Iran from third parties who would then ship the fuel onto Iran.[53] In addition, concerns about the pricing and quality of Venezuelan gasoline from Iran’s parliament could further delay any gasoline shipment: on September 30, 2009, the chairman of the Majlis’ Energy Committee, Hamid-Reza Katouzian, emphasized that no deal had yet been signed.[54]

More than any other country or company, China could provide the financial investment, credit, technology, and political backing for gasoline supplies to Iran in the event of sanctions. In addition to its current indirect gasoline shipments to Iran, China has an interest in greater exports to Iran because of the terms Iran offers Chinese companies to compensate for the risk of doing business in Iran:

The recent signed buyback contracts with CNPC and Sinopec provides more flexibility in fiscal terms, shorter payback periods, and finally a 3% higher rate of return (ROR) for contractors compared with other regular buyback contracts in the past.[55]

China has been involved in at least ten projects valued over $32 billion in Iran just this year.[56] These projects, in various phases of discussion, contracting, or construction, focus primarily on natural gas and oil extraction efforts in the Persian Gulf, particularly the North and South portions of Azadegan and Pars fields. China also has a large volume of gasoline exports: China shipped nearly 300,000 tons of gasoline, or roughly 83,000 barrels per day, during the month of August, enough to increase its share of the Iranian gasoline import market from one-third to two-thirds if China decided to devote its entire gasoline export to the effort.[57]

Chinese foreign policy has made the acquisition of energy resources a primary goal to meet rising domestic consumption and demand. Given China’s global business presence and extensive economic involvement in Iran, one could reasonably expect China to take advantage of the opportunity to fill the demand gap of 80 to 90,000 gasoline barrels per day that sanctions could leave in Iran. China has done business with other sanctioned nations – such as Sudan and North Korea – and would likely attempt to fill Iran’s gasoline need rapidly.

Potential Neighborhood Sources: Central Asia

Iran’s Central Asian neighbors, given their large energy deposits and close proximity to Iran, could provide extra gasoline if Iran could not receive supply from Western sources due to sanctions. Kazakhstan and Azerbaijan, among other Central Asian nations, could come under pressure, however, from the United States and its European allies to avoid supplying Iran with gasoline.

As mentioned above, Iran currently receives some gasoline imports from Turkmenistan at its Caspian port of Neka.[58] A dispute with Russia over an explosion on a Turkmen-Russian pipeline in April 2009 caused Turkmenistan to consider new markets for its natural gas exports, which are the sixth-largest in the world.[59] On September 23, 2009, Iran announced that it would increase this winter’s natural gas imports from Turkmenistan by 40 percent.[60] This increased natural gas cooperation could result in increased gasoline exports from Turkmenistan, especially if Iran is willing to pay a higher price.

Iran could potentially receive some gasoline from additional Central Asian sources, although many of these nations have commitments to other clients or their own markets. Kazakhstan, for example, consumed nearly 46,000 barrels of gasoline a day in 2005.[61] Assuming even a small amount of growth in domestic consumption, Kazakhstan will not be able to export much gasoline, as it produced only an estimated 55,000 barrels of gasoline per day in the first seven months of this year.[62] Indeed, in 2006, Kazakhstan exported only 4,697 barrels of gasoline per day, according to UN data.[63]

Azerbaijan has a significant commitment to its Baku-Tbilisi-Ceyhan (BTC) pipeline, inaugurated in 2006, but could potentially ship its gasoline to Iran as part of a newly expanded energy relationship that began with a September 16 announcement that Iran would import 5 billion cubic meters of natural gas from Azerbajian annually.[64] Azerbaijan reportedly exported nearly 50,000 barrels per day to Iran in 1996, when the Nagorno-Karabakh conflict with Armenia in the mid-90s shut off Azeri gasoline exports to Russia.[65]

Any of Iran’s northern Central Asian neighbors deciding to expand their gasoline shipments to Iran would have to use existing railroad networks or shipping channels in the Caspian. A “nominal amount” of gasoline currently transits the Caspian, however, oil shipping and receiving facilities along the Caspian could be converted to handle gasoline deliveries.[66] Kazakhstan, for example, sends 70-80,000 barrels per day of oil south to Iran as part of a swap agreement whereby Iran consumes the oil and sells an equal amount on the international market, in an effort to deliver Kazakh products to the rest of the world; Kazakhstan’s Aktau port may deliver as many as 400,000 barrels per day via barge across the Caspian for Western markets.[67] Kazakhstan and other Central Asian countries could divert some of the facilities currently utilized for crude oil to deliver gasoline, although this would result in economic disruption that Iran’s northern neighbors may be unwilling to bear as a price for access to the Iranian gasoline market.

On land, Iran enjoys the best rail links with Turkmenistan; the border town of Sarakhs reportedly handles 75-76 percent of Iran’s railroad exports as it delivers Central Asian exports to the world market via the port of Bandar Abbas.[68] Other rail links are not sufficient to support a large import of gasoline: the newly-inaugurated railroad between Iran and Pakistan remains in sub-standard condition,[69] the Turkish railroad link requires the usage of a railroad ferry not far from the Iranian border,[70] and the Azeri rail network connects with the Iranian rail only through the Azeri enclave of Nakhichevan, which is itself separated from the Azeri transport network by Armenian-controlled Nagorno-Karabagh.

A 1996 report on the inauguration of the Sarakhs railroad indicated it had annual freight tonnage capacity of two million expected to rise eventually to eight million. At the low end, this means the railroad could potentially handle 46,700 barrels per day averaged over a year, at the high end, 186,958 barrels per day (2002 figures indicate the railroad capacity may fall above the midpoint of this range).[71] This would mean an exclusion of other traffic from the rail line,[72] potentially causing economic disruption in Central Asian countries that would face difficulty in getting their products to the world market via the Persian Gulf, as well as difficulties in Iran itself as the reduced freight capacity could reduce transportation of basic goods within Iran. Iran would likely get around the tonnage limits and potential reduced freight by trucking gasoline or other products, which it would have to do anyway if receiving goods via the Iraqi or Azeri borders.  A daily convoy of roughly 420 trucks would be required to meet a demand gap of 90,000 gasoline barrels per day.[73]

Smuggling: Iraq, Turkey, Afghanistan

Increasing smuggling of gasoline from outside Iran or, perhaps more importantly, decreasing current smuggling of Iranian gasoline to points outside Iran could have a significant effect on the supply of gasoline available for consumption in Iran.

On September 24, 2009, Iran’s Deputy Economy Minister Mohammad-Reza estimated that smugglers spirit 250,000 barrels per day of various oil products – including gasoline, diesel, and other refined products – out of Iran every day.[74] Individual reports of seized cargoes indicate that large volumes make their way out of the country. Iran’s Law Enforcement Forces seized 75,000 liters of gas oil (which differs from gasoline), or 471 barrels, near the coastal cities of Mahshahr and Hendijan in July 2009.[75] In December 2008, Ahmad Moradi, a Hormozgan province security official, said that security officials had seized ten tankers carrying 4600 tons, or 39,000 barrels, of various types of fuel during 2008, an increase of 232 percent over smuggling figures in the previous year.[76] In August 2007, Iranian police seized 317,500 liters, or almost 2,000 barrels, of diesel fuel. Many more smugglers likely evade the border authorities, making these figures a small fraction of the total number and thus explaining Mohammad-Reza’s large estimation.

As indicated by the August 2007 and overall 2008 seizures, much of the naval smuggling may involve fuels other than gasoline, while gasoline smuggling may occur primarily over land routes. The August 2007 report claims that gasoline smuggling between Iraq and Iran has reversed, and that smugglers now bring gasoline into Iran from Iraq.[77] Both sources attribute the drop in gasoline smuggling to Iran’s introduction of the Smart Fuel Card, which the analyst estimated reduced smuggling by 30-40,000 barrels per day – a large amount of the high of 70-80,000 barrels he estimated individuals, probably those connected to Iran’s Islamic Revolutionary Guard Corps, smuggled per day on average in 2007.[78]

However, current gasoline prices make large-scale gasoline smuggling from Iraq into Iran seem improbable: Iraqis paid between 35 and 39 cents per liter as of August 2009, compared to the Iranian price of 10 cents per liter.[79] As of November 2008, Iran’s other neighbors also paid much higher prices than Iranians: Turks paid 187 cents per liter and Pakistanis 84 cents at the time, creating large incentives for smuggling along Iran’s borders. Such price gaps help explain the large smuggling quantities estimated by Mohammad-Reza.[80]

Reducing subsidies for gasoline, as discussed in the prior section, would lessen the price gap between Iran and its neighbors. Increased enforcement in Sistan va Baluchistan province, which borders Pakistan and has seen violence against Iranian security forces from its Baluchi population, and the Azerbaijan region, which borders Turkey’s restive Kurdish-majority southwest, could potentially prevent more gasoline from leaving Iran. However, given the economic incentives of smuggling and unstable security situations in those areas, reducing smuggling without reducing subsidies would be a difficult challenge for the Iranian government.

According to the National Iranian Oil Refining and Distribution Company (NIORDC), Iran currently produces 288,205 gasoline barrels per day, through nine refineries detailed in Table 1.[81] Adding this figure to 128,000 barrels per day in imports approximates the reported consumption figure of roughly 408,000 barrels per day.

Iran hopes to expand its current gasoline refining capacity through the expansion of most of its existing refineries (Table 2) and the construction of seven new refineries (Table 3).[83] Completion dates for the expansion projects fall mostly within 2010 while NIORDC reports that most of the new refineries should be finished in 2011; one recent Iranian media report claimed that “nine refinery development projects” were “80 to 90 percent” complete, according to the managing director of the National Iranian Oil Company (NIOC).[84]

Given the complexity of these projects, however, completion dates may slip, although at least one analyst believes most of the refineries will arrive by 2011 or 2012.[85] Much of the refinery expansion also depends upon technology, knowledge, or patents from European companies, assets that may be unavailable – or at least more expensive – to the Iranian refinery expansion program if the West enacted sanctions. China may be able to provide such assets, as it has experience expanding its own refineries on a large scale, although it could face some hurdles in exporting to Iran non-Chinese technology used in Chinese refineries under a new sanction regime.[86] The huge size of the investment required – billions of Euros for some of the projects – also may delay some of the projects as sanctions could make financial capital more difficult for Iranian companies to attain.

However, the sheer volume targets of the expansion and construction programs would make them sufficient to meet Iran’s energy needs if only a small portion of the additional volume came online. The expansion projects would add 251,000 barrels per day while the new refineries would increase Iran’s domestic gasoline refining capacity by a massive 704,500 barrels per day. The additional 955,000 barrels per day refining capacity would make Iran one of the largest gasoline refiners in the world. These capacities almost certainly overestimate the result (probably as part of a propaganda scheme to show Iran’s ability to resist sanctions), and Iran will likely fail to meet completion dates even where accurate capacity estimates exist. Only 13.4 percent – 128,000 barrels per day – of the expansion and construction capacity, however, needs to come online for Iran to meet easily its current consumption needs.

Iran could also produce, for a short period, more gasoline from its current refining capacity by producing low-octane gasoline, resulting in a higher-quantity, lower-quality product. [89] While not a long-term solution, such an effort could provide a short-term hedge against a lack of gasoline imports. Finally, Iran has a reported 1.4 billion liters of gasoline in reserve, which could provide roughly 24,000 barrels of gasoline per day for an entire year if fully exhausted.[90]

Even after increasing prices in 2007, gasoline still cost less than a comparable amount of mineral water.[91] This is because the Iranian people consider gasoline, even more so than nuclear energy, to be their “natural right.”[92] The ruling conservative elite appeals to its working-class power base by keeping gasoline prices artificially low through government subsidies.

The 2007 rationing plan was a first step towards building an energy independent Iran. Domestic backlash against these initial measures, however, made Iranian officials wary of taking further action. Protestors set fire to at least 19 gas stations across the country, throwing stones and shouting anti-Ahmadinejad slogans; demonstrators also attacked state-run banks and business centers. During clashes with anti-riot police, at least one woman was shot and killed.[93] Despite the initial unrest, the rationing system remained in place.

Proposed increases in gasoline rationing and prices could generate internal protests on a larger scale. If Ahmadinejad’s economic proposals pass, gasoline quotas will likely decrease from 100 to 80 liters per month. The subsidized price of gasoline will increase from 10 to 40 cents per liter (a 300 percent increase) and the market price will increase from 40 to 65 cents per liter (a 62.5 percent increase).[94] This is significantly greater than the 25 percent price increase in May 2007. Increasing the cost of gasoline would also add to the economic burden of ordinary Iranians, who already suffer from high housing prices, rising unemployment, and a declining Gross Domestic Product (GDP) growth rate.[95] Historically, gasoline rationing has led to high price inflation of basic goods and services. Just one day after the 2007 gas rationing plan was implemented, for example, food prices and taxi fares increased by double digits.[96] According to the Parliament Research Center in Iran, the proposed bill would cause the current inflation rate to jump to 48.6 percent.[97] Such drastic changes would likely have an immediate impact on the standard of living in Iran and fuel popular anger against government policies.

Sparks of public outrage might set fire to an already tense political atmosphere in Iran. In the wake of the disputed presidential elections and controversial government crackdowns, any new provocation might empower regime opponents.[98] Although the opposition movement has weakened since the massive post-election demonstrations in June, renewed protests at the Quds (Jerusalem) Day rally in Tehran suggest that internal dissatisfaction persists.[99]

Ironically, the group that should be the target of strengthened sanctions, the Islamic Revolutionary Guard Corps (IRGC), is least likely to be affected.[100] Some analysts have argued that the IRGC actually benefits from a more economically isolated Iran because it no longer has to compete with foreign companies for government contracts.[101] For example, one of the main engineering companies under IRGC control, Khatam al-Anbiya, has secured at least $7 billion in government oil, gas, and transportation contracts. Although IRGC companies do not always have the necessary technical expertise for some projects, they still generate revenue by acting as an intermediary between the government and international companies. IRGC members may continue to receive government contracts and subsidy money even if the government adjusted domestic economic policies.[102]

Implementing refined petroleum sanctions could pose several challenges for policy makers. For instance, if financiers or insurers of Iran’s petroleum curb their business when faced with the threat of sanctions, less-risk averse institutions may negate this effect. These second-tier financiers and insurers, while perhaps not possessing the prestige and attractiveness of established operators, have previously carved out business where first-tier firms chose to protect their reputation and cease trade-related activities with Iran. These firms often do not require or desire access to U.S. markets and are therefore immune to the threat of U.S. sanctions penalties.[103]

Unilateral U.S. sanctions legislation targeting Iran’s refined petroleum imports may not necessarily be enough of an impetus for firms to curb their gasoline exports to Iran, despite preemptive moves made by Reliance and BP. An official from the French firm Total, a major gasoline exporter to Iran, recently indicated that the firm would adhere to bans on petroleum export to Iran if such laws were passed in both the U.S. and Europe.[104] The potential effectiveness of the U.S. legislation in persuading firms to comply, thus, could be dependent on European acquiescence in adopting similar laws, in addition to China and Russia’s willingness to break out of a historical pattern of diluting such measures when proposed for adoption by the UNSC.

Moreover, Iran could reduce its gasoline consumption through rationing or reduced subsidies. It could also alleviate a drop in imports by seeking alternative sources, such as China, Venezuela, Central Asia, and the black market. While such measures could cause short-term political instability in Iran, the effect could be ephemeral if the Iranian regime manages to bring to completion even a small portion of the projects now underway to develop its indigenous refining capacity.

It is not possible to predict with any certainty what effect the harsh sanctions now under consideration will have on the Iranian economy, let alone on the regime’s behavior.  It is clear that the regime has already taken into account the possibility of such sanctions and developed a plan it may think will circumvent them.  If the regime has confidence in its plan—however realistic it might or might not be—then the imposition of sanctions might generate no significant change in Iranian policy in the short term.