Iran already spends between $1,200 million-1,500 million on imported petrol every year - equivalent to around 15 per cent of the country's total import bill. But with consumption growth of between 10-13 per cent and no new refining capacity ready to come on stream, the country faces a fuel crisis.

'Because the Majlis has rejected the government's request to increase its fuel import budget, other measures will have to be taken to satisfy demand,' says Houman Dolatshahi, a senior consultant at Atieh Bahar Consulting. 'The idea of rationing has been around for a while, but it now looks quite likely to be introduced sometime over the next three months.'

Petrol is sold at $0.08 a litre, well below the production cost of $0.25 a litre. Import costs are significantly higher. Under the third five-year development plan, which will end this year, petrol prices were to be increased annually by 10 per cent. However, with official inflation of 16 per cent and unofficial inflation even higher, the real price of gasoline has been falling.

The government aims to completely end its subsidy programme by the end of the next five-year development programme in 2009. It hopes the increase in prices will help optimise Iran's energy use in parallel with other initiatives to improve fuel specifications for cars, industry and electricity production.

The economic and political ramifications of rationing could be significant. Unofficial taxi services provide a high proportion of Iran's urban employment profile. The introduction of rationing could hit such small businesses very hard, increasing the unemployment rate. The Majlis also faces nationwide elections in February, shortly before the new budget law comes into effect. A measure as unpopular as rationing could provoke a backlash at the polls.

At the heart of its plans to introduce market petrol prices is the massive expansion of refining capacity. In an exclusive interview, to be published in MEED 21:11:03, National Iranian Oil Refining & Distribution (NIORDC)planning head Asadollah Mikaeili lays out the country's plans for boosting capacity. He says Iran's total gasoline production capacity is to be doubled to around 500,000 barrels a day (b/d) by 2009. The expansion programme will be concentrated in Arak, Isfahan and Bandar Abbas refineries.

www.meed.com/economy