IRAN AND DUBAI LEAD THE WAY99IRAN’S DRAMATIC REFORMSBy 2010, subsidies on energy had pushed Iran into the advanced stages
of economic cannibalism. Runaway demand for gasoline and diesel fuel
had transformed a country with the fourth- highest global oil reserves
into a net importer of refined fuels. Iran found itself that year buying
gasoline at world wholesale prices of around US$2 per gallon and then
reselling the fuel domestically for 38 US cents.^2 Domestic demand was
not only draining away exports of crude oil, the Islamic Republic’s chief
source of hard currency. It was also encouraging too much driving,
which led to traffic congestion, air pollution, collisions, and all the atten-
dant public health problems. Fuel was so cheap that Iranian smugglers
weren’t just moving it to Pakistan and Turkey. They were even loading
it on boats and reselling it across the Gulf, in Oman, where fuel was also
subsidized, just not by as much.^3 Giving away energy was costing Iran
$100 billion a year, a quarter of its GDP.^4
Iranian leaders understood the political risks involved in taking away
social welfare benefits, but by 2010, with oil near $100 a barrel, the eco-
nomic distortions had outweighed the risk. On December 18, 2010, Iran’s
president, Mahmoud Ahmadinejad, went live on national TV and told
the nation that he had ordered “economic surgery” to be performed on
an energy subsidy program that had been bleeding the Islamic Republic
dry.^5 “We’ve been giving out these subsidies in an unjust manner for fifty
years,” Ahmadinejad said. “We’re now using four times more energy
than necessary for our current standard of living. With a little effort, we
can reduce our energy consumption so that Iran can become the most
advanced country in the world.”^6
The president ordered drastic increases in fixed prices that had never
been indexed to inflation and had grown cheaper in real terms over the
years until they were among the world’s lowest. Ahmadinejad and his
policy makers built public support by pointing out how subsidies encour-
aged waste. Seventy percent of the subsidy was captured by the rich,
with their fleets of personal vehicles and large homes. Iranian economists
devised tiered prices that kept modest amounts of electricity and fuel