Iran is due to start rationing fuel in September in a move that risks provoking social discontent. While Iran is a major oil producer, its refineries have a capacity of just 40 million litres of petrol a day: demand is close to 70 million litres. The shortfall is imported at great cost to the government because it is sold at heavily subsidised prices to the consumer. Much is then smuggled to Iran's neighbours where petrol prices are far higher, costing the Iranian government more than £542 million a year. The thirst for petrol has been compounded by a big boom in car sales. Iran has turned into a regional car-making hub with foreign firms such as Peugeot, Hyundai and Renault signing production deals in the Islamic Republic. These were originally seen as export ventures, but Iran's soaring earnings from oil sales and a growing culture of cheap loans means Iranians are buying more cars. Demand for petrol is growing at 11 per cent a year.
Parliament has now slashed the budget for petrol imports, which means the government has either to raise prices or ration petrol: both are unpopular moves. Officials favour halting petrol imports and introducing rationing. It is feared that price increases , the alternative, could stoke inflation which is already running at 12.1 per cent. President Mahmoud Ahmadinejad has estimated that without rationing, Iran would need to spend £2.7 billion to import enough extra fuel to keep pace with demand. But the defiant president is also keen to show the world that Iran can survive without imported petrol in the event of sanctions over Tehran's nuclear programme.