He is the son of a blacksmith, portrays himself as a champion of the working man and was swept to power pledging to put Iran’s “oil income on people’s tables”. But despite high oil prices, President Mahmud Ahmadinejad has failed to raise living standards. Moreover, Opec’s second biggest oil exporter is venturing into the controversial territory of petrol rationing — a politically sensitive but economically essential measure that has been stalled over for a decade.

Even now, political jitters mean that the rationing scheme is unlikely to go ahead on time. Some MPs are urging a postponement until September, citing technical glitches with the “smart cards” issued to motorists to measure their fuel consumption. Some of the card-reading devices installed at petrol pumps have startled motorists by sucking up fuel from their tanks instead of pumping in petrol.

Petrol consumption in Iran far outstrips the capacity of Iranian refineries, forcing Iran to import billions of dollars worth of petrol at international prices. It is then sold to the motorist at prices so heavily subsidised that a litre of fuel is cheaper than a litre of mineral water. This has encouraged wastefulness and smuggling abroad — and has placed a huge burden on the national Budget.

Iranian motorists will still be pampered with the cheapest petrol in the world under the rationing scheme. Prices are due to rise to about 100 tumans (11 US cents) a litre from the current 80 tumans. Some economists fear that raising petrol prices could stoke inflation, which is estimated by parliament at more than 20 per cent. Others worry that rationing could fuel social discontent.

Curbing use of a commodity that Iranians regard as a birthright is the latest embarrassment for the populist President on the economy, which the US views as Mr Ahmadinejad’s Achilles’ heel. It is a tender spot that the US is squeezing in the hope of forcing Iran into compliance on its nuclear programme.

When Mr Ahmadinejad’s allies suffered a setback in municipal and clerical elections last December, it was seen as a call for him to moderate his confrontational foreign policy and to focus on economic woes at home. This year, teachers protesting against low pay clashed with riot police. On May 1, thousands of workers rallied in Tehran to complain that many had not been paid for months and to call for the release of imprisoned union leaders. They brought a coffin to symbolise the burial of workers’ rights. Meanwhile, foreign investment for Iran’s ageing oil infrastructure has been curbed by the crisis over its nuclear programme and by Mr Ahmadinejad’s rhetoric on issues such as the Holocaust and Israel.

“When you pursue a confrontational foreign policy, not only do you not have foreign investment but you have capital flight: the average Iranian businessman is more apt to put his money in Dubai or Turkey,” Karim Sadjadpour, of the Carnegie Endowment for International Peace in Washington, said. “In terms of undermining the Iranian economy, the United States feels that Ahmadinejad is their great ally,” he told The Times.

The economy is dominated by a sprawling and inefficient state sector and depends heavily on oil revenue, which accounts for more than 80 per cent of export earnings. Like inflation, the unemployment rate is in double digits while real GDP growth is about 4.6 per cent. Washington has already had success in its unilateral drive to shut Iran out of financial markets. Next month, Western powers are likely to press for an increase in the number of Iranian banks to be blacklisted by the UN unless Iran halts uranium enrichment.

Iran denies that sanctions are having any impact and is relying on self-sufficiency to build immunity against possible tighter UN sanctions. Iran is also courting trade and investment deals with countries in Asia, Latin America, Africa and the Middle East, aiming to dilute the international appetite for sanctions.

A recent EU report suggested that sanctions alone will not prevent Iran producing enough high-grade uranium for a nuclear bomb. “Iran has shown great resilience in the past, for example during the Iran-Iraq War. The Government may also exploit sanctions to benefit nationalism or to explain economic failure,” the study said.

David Knott, executive editor of the Middle East Economic Survey, said that Iran was doing “surprisingly well at expanding its oil production capacity”, which has increased to about 4.3 million barrels a day from 3.8 million two years ago when no UN sanctions were in place.

“But since the level of outside investment has fallen, Iranians have started taking money from what they call their oil stabilisation fund — a reserve they like to keep for social programmes — to spend on investment in oilfields,” Mr Knott said.

All is not gloom for the Iranian economy, he added. “It has always jolted from one crisis to another. There are plenty of economies in worse shape.”

Gas Guzzling

Iran is the world's fourth-biggest oil producer of crude oil and Opec's No.2 exporter, but has to import 40 per cent of its petrol needs because of a shortage of refining capacity. Iran's seven million cars — many of them fuel-inefficient old locally made Peykans, which are based on the extinct British Hillman Hunter — consume around the same amount of petrol as the 35 million cars on UK roads.

Petrol consumption has now reached 84 million litres a day and demand is growing at 10 per cent a year. Total energy subsidies reached 17.5 per cent of GDP in 2005-06.

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