The removal of energy subsidies around the world is used as a tool for development, social justice, and a transition to clean energy. In Iran, however, the story is reversed. Because of rentier structures, the lack of infrastructure, and political pressures, fuel price hikes are neither development-oriented nor just; they are instead a coercive way of shifting the burden of costs onto the people.
Energy subsidy policy in Iran is one of the most complex, costly, and politicised economic policies in the country. Over the past two decades, various reformist and conservative governments have repeatedly tried to “adjust” gasoline prices and reduce the financial burden of subsidies, but almost all of these programmes have either been left half-finished or have produced the opposite of their intended results.
Fuel price increases in Iran are usually discussed within two opposing clusters of factors:
- Justifications (economic and structural “necessities”)
- Losses (negative economic and social consequences)
Together, these two dimensions provide a fuller picture of the policy effects of raising fuel prices.
Governments present fuel price hikes as inevitable. The main stated aim is to reduce the financial load of subsidies on the public budget. Fuel subsidies are one of the largest items of expenditure for the Iranian state. Price increases are usually justified as a way to reduce the budget deficit or reallocate resources to other sectors. Some also propose these hikes as a solution to fuel smuggling, arguing that the government ignores its own central role in organised fuel smuggling and instead blames the price gap between domestic and neighbouring countries for creating an incentive to smuggle.
To these justifications, environmental arguments have been added: that raising energy carrier prices is a tool to reduce excessive consumption and improve energy efficiency. The Islamic Republic attempts to advertise fuel price hikes as a way to change energy consumption patterns and push people toward using public transport. In some analyses, it is also argued that energy subsidies benefit higher-income groups more because their consumption is higher, and subsidy reform is therefore presented as an attempt at social justice.
Removing Gasoline Subsidies: A Worn-Out Road to Nowhere
Over the past 25 years, three governments with reformist or moderate leanings have taken steps to reform fuel prices:
• Khatami’s government
• Ahmadinejad’s government (first phase of the Targeted Subsidies Plan)
• Rouhani’s government
Khatami administration (1997–2005): Limited reforms without infrastructure
This administration tried to gradually make energy prices more realistic, but during this period, public transport did not expand, the car industry remained inefficient, and gasoline subsidies stayed very heavy. According to official statistics, consumption even increased. No social protection programme was implemented in parallel or in advance. No structural changes were planned along the way.
Ahmadinejad administration (2010): The largest price reform in Iran’s history
The first phase of the Targeted Subsidies Plan (2010) was the biggest jump in energy prices in Iran. It was decided that 50% of the revenues would be paid to people as direct cash transfers, 30% would be allocated to production and public transport, and 20% would go toward government debt. However, according to official reports, the share allocated to production and public transport was far lower than planned.
A large portion of the new resources was absorbed into current expenditures, short-term payments, and the government’s financial challenges. The result was that while the price reform was implemented, no structural reform took place.
Rouhani administration (2014–2016; 2019)
In the first phase, gasoline was returned to a single price (1,000 tomans), but there was no significant expansion or development in the metro, buses, or the public transport fleet.
The second phase (November 2019) saw a sudden price increase (1,500/3,000 tomans). The government announced that the new revenues would be allocated to 60 million people, but there was no transparent, supervised, or clearly defined infrastructure plan. Rouhani’s government implemented a shock-therapy style reform that further fuelled inflation. It went as far as brutal repression of protesters, deepening social discontent and destroying public trust.
Overall, after decades, none of the reformist or moderate-leaning governments prepared and developed the necessary infrastructures before raising prices. Price reforms were carried out, but the basic structures of consumption, transport, car production, and energy use essentially remained untouched.
Necessary Steps in Reviewing Gasoline Subsidy Removal (Standard Global Pattern)
Some countries have managed fuel subsidy reforms relatively successfully (China, Indonesia, Malaysia, Turkey, Mexico). They usually share five common stages:
- Analyzing drivers and identifying stakeholders:
Whether subsidies are maintained or removed, the main beneficiaries are energy-intensive, low-efficiency industries, organised smuggling networks, large car manufacturers that do not compete in any global market and are far from international standards. These actors remain beneficiaries, supported by political pressure and repression through the responsible institutions. - Preparing alternative infrastructure:
In these experiences, policy documents recommend that fuel price hikes must be the “last step”, not the first. A range of infrastructures must be prepared before reform: increasing the number of buses and metro cars, expanding CNG, developing low-consumption vehicles and suburban transport; as well as monitoring prices, preparing and implementing comprehensive systems of social support for vulnerable groups, and policy coordination to control inflation and the spillover of fuel price increases onto other essential goods. - Communication strategy and public persuasion:
In most countries that have implemented successful reforms, governments ran public information and awareness campaigns for six months to two years. There is a degree of trust between citizens and the state, and people believe that major decisions by those in power serve national and collective interests. In Iran, however, as in other domains shaped by “Basiji-style” rapid, militarised crisis management, the process began with the harshest repression and the imposition of the greatest hardship on vulnerable groups, all in a vacuum of trust and without any collective participation of the people. - Delivering social support and services before price changes:
In places like China and Indonesia, cash and in-kind support were delivered before price hikes, targeted toward the consumption basket of the affected groups, to prevent immediate and steep impacts on inflation and essential goods prices. - Gradual increases and multi-year price planning:
Globally, annual increases of 5–20% in energy carrier prices are common. In Iran, however, increases of 50–200% have usually been implemented suddenly. At the same time, the country is grappling with extremely abnormal inflation, expanding poverty and informal settlements, and widespread pseudo-jobs and non-productive work. In its macro development plans and distribution of opportunities and wealth, the state follows no clear path of justice and public welfare.
How Did China Act?
From 2008 to 2016, China implemented one of the most structural fuel reforms in Asia. More than 60% of the revenue from price differences was directly allocated to the development of public transport, especially electric public transport, and the modernisation of refineries that were among the main sources of pollution. Diesel buses were gradually replaced by electric buses and urban rail systems. Pathways for “green mobility” were expanded. Fuel prices were set within a “price window” rather than through sudden administrative hikes. Urban fuel consumption reductions contributed to up to a 25% decrease in air pollution levels in some megacities. This was a significant reduction that became a stabilised policy target, while public transport experienced historic expansion—a process that is still ongoing.
Budgets Poured into Non-Transparent, Security, Propaganda, and Rent-Seeking Sectors
Based on official budget data, reports from the Parliamentary Research Center, and analyses by independent economists, Iran faces several simultaneous challenges. There are countless institutions with extra-legal budgets; dozens of budget lines that have neither financial transparency nor any measurable output. These can be described as “bottomless pits” in the budget. Propaganda expenditures with unclear social impact and no economic evaluation. Organisations that absorb a large share of the budget and serve merely as channels for disseminating the regime’s ideology. These expenditures are in no way comparable to investment in key sectors such as transport.
Gasoline subsidies in Iran (before the so-called “reform” of November 2019) amounted to about 8–10% of GDP. The share of gasoline in this subsidy was estimated at about 50–60%. Domestic media reported that the lowest-income deciles consume only 7–10% of all energy subsidies. Security and military institutions (mostly outside the direct supervision of parliament) consume about 15–20% of the entire national budget. This accounts for roughly 3–4% of GDP.
So who really benefits from energy subsidies? In Iran, the lion’s share goes to the steel industry, petrochemicals, car manufacturers, and monopolistic conglomerates. These groups and organisations receive direct and indirect support from the state in any case. This explains why, in this process, the full weight and hardship of such macro policies is imposed on the shoulders of ordinary people.
Public transport and the car industry in Iran are severely worn out.
• Urban bus fleets: roughly 30–40% are worn out.
• Metro stock: around 15–20% is worn out or in need of major overhaul.
• Intercity rail lines: more than 40% are worn out and below global standards.
• Private cars and road transport: average vehicle age is about 10–12 years, with fuel consumption 5–7 litres per 100 km higher than global standards, turning roads into a “killing field” for citizens.
Hard-to-cut expenditures in the governance structure of the Islamic Republic are so numerous that it becomes clear why the savings from fuel price reform have never reached the metro, bus system, or rail network.
How Do Reformist Economists and Institutions Justify Fuel Price Hikes?
Economists such as Saeed Laylaz and the technocratic reformist current typically rely on three main arguments:
• Energy prices must approach global levels.
This is economically sound in principle, but only on the condition that infrastructures are ready, trust exists between people and the state, and the government’s priorities align with citizens’ needs. These conditions are systematically absent in Iran, where all macro programmes are implemented in fragmented fashion and crises are treated in isolation, without any sustained vision of national interest.
• Energy subsidies benefit the rich.
In Iran, removing subsidies does not automatically benefit the poor. As noted, public transport is inefficient, vehicles are high-consumption and low-efficiency in all conditions, and working with cars or motorcycles is a key source of income for many households. The structures that systemically produce poverty and injustice are vast and entrenched, and there is no guarantee that savings from subsidy reforms will be invested in foundational infrastructures.
• Raising gasoline prices is the only way to save the state budget.
Given the government’s high indebtedness and inability to cover current expenditures, this may seem important. But serious and complex political and economic problems remain. Reducing the deficit by putting pressure on the people, without structural reform, merely reproduces and deepens inequality.
These economists downplay the role of rentier structures, lack of transparency, and failures to invest in infrastructure. Their prescriptions thus amount in practice to austerity policies imposed on the people, not development-oriented reforms.
Reducing Fuel Subsidies in Iran: Economic or Political?
Globally, energy subsidy removal is a serious economic and social policy aimed at strengthening transport infrastructure, increasing the use of clean energy sources, and laying the tracks for social justice. It optimizes energy consumption and is especially crucial for countries whose economies rely heavily on fossil fuels.
In Iran, however, due to rentier structures, opaque budgets, lack of infrastructure, weak planning, and political pressure, fuel subsidy reductions are not only top-down and coercive; they are also non-developmental, unjust, and a mechanism for reinforcing monopoly and corruption.
Without structural reform, fuel price reform will not pave the way for development. Instead, it becomes a tool for regime survival in budget allocation and for intensifying pressure on the people.
