Iran subsidy cut hits demand

Iranian households cut gas consumption in response to subsidy rollbacks.

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Iranian gas demand is falling in response to subsidy cuts.

The first utility bills with higher rates for gas are only now being distributed within the country, but consumption has already fallen sharply in anticipation of the price rises, said Hatef Haeri, a consultant with ICG Group of France, which has regional offices in Dubai and Tehran.

"Just the announcement of the new prices caused gas consumption to drop 14 per cent," Mr Haeri told the Gas Arabia conference in Abu Dhabi last week. "Power consumption has fallen by 6.2 per cent since the subsidy removals were announced."

Besides fuelling gas stoves and ovens in many Iranian households, gas is also burnt to produce much of the nation's power supply, meaning reduced electricity demand will also affect domestic gas consumption.

Tehran started phasing out its huge subsidies on liquid petroleum fuels, gas and electricity in mid-December last year, as international sanctions over Iran's nuclear programme put pressure on the state treasury.

At the same time, the government issued cash payments to poor families to offset the effects of higher energy prices. Fuel subsidies are to be phased out over five years, according to the Iranian government plan that received parliamentary approval last year.

The effect of the first tranche of the planned reductions in subsidies has more than doubled the price of gas for most Iranian households. A medium-sized family would see its gas bill rise by as much as US$46 (Dh168) a month if it did nothing to curb consumption, Mr Haeri estimated.

Iran is also moving to a "slab scale" for residential gas prices, with low-consumption households paying a lower average rate than those that use more gas.

Even so, with the new residential gas rates likely to average about 7 US cents per million British thermal units (btu), according to Mr Haeri, Iran's domestic gas prices are still among the lowest in the world.

US gas prices, which are low by international standards, are about $4.50 per million btu, while Tehran has recently sought $8 per million btu for gas exported from Iran. That makes the consumption cuts already achieved in Iran all the more remarkable, providing a stark lesson in the power of energy subsidies to promote waste.

"This idea of paying poor people cash in advance might work, providing a lesson for other Middle East governments that want to cut subsidies," Mr Haeri said.

"Iran's poor are even quite happy about the subsidy removals. They have been thinking, 'why should we pay rich people to waste energy'?"

Most analysts regard cutting waste as a necessary first step if Iran is to realise its potential of becoming a major gas exporter.

The country has the world's second-largest gas reserves but is currently a net importer, buying more gas from Turkmenistan than it exports to Turkey.