Iran's economy is heavily reliant on oil exports, but the country is attempting to diversify. The country is earning high oil export revenues, but gasoline import costs are also rising rapidly.

Iran's economy relies heavily on oil export revenues - around 80-90 percent of total export earnings and 40-50 percent of the government budget.? Strong oil prices the past few years have boosted Iran. s oil export revenues and helped Iran's economic situation.? For 2004, Iran's real GDP increased by around 4.8 percent. For 2005 and 2006, real GDP is expected to grow by around 5.6 percent and 4.8 percent, respectively. Inflation is running at around 15 percent per year.

Despite higher oil revenues, Iranian budget deficits remain a chronic problem, in part due to large-scale state subsidies on foodstuffs, gasoline, etc. Expenditures on fuels were estimated at $4.7 billion in 2004, and the country's parliament (the Majlis) has rejected measures to raise consumer prices. To the contrary, in January 2005, the Majlis decided to freeze domestic prices for gasoline and other fuels at 2003 levels. Currently, gasoline costs less than 40 cents per gallon in Iran, far below market cost, contributing to a rapid (8-10 percent per year) growth rate in gasoline consumption. In addition, the country imports around one-third of its gasoline.

To pay for sharply increased subsidy expenditures, the Majlis voted in mid-November 2005 to spend an extra $3 billion during the 2005/2006 fiscal year. Of this, $2.6 billion is to be withdrawn from the country's oil stabilization fund (OSF), which was established in 2000 primarily as a tool for protecting the Iranian economy in the event of an oil price collapse. In total, Iran is expected to spend around $4 billion on fuel imports . largely gasoline . this year, up from about $2.8 billion last year. In addition, Iran is talking about instituting a rationing system, whereby low prices would apply up to a certain point, but beyond that the full price would kick in. The two-tier pricing system, using . smart cards,. could kick in as early as April 2006. As of late November 2005, however, the Majlis had not yet taken action on the issue.

Another problem for Iran is lack of job opportunities for the country. s young and rapidly growing population. Unemployment in Iran averages around 14 percent, but is significantly higher among young people.

In addition, Iran is attempting to diversify its economy by investing some of its oil revenues in other areas, including petrochemicals. In 2004, non-oil exports rose by a reported 9 percent. Iran also is hoping to attract billions of dollars worth of foreign investment to the country by creating a more favorable investment climate (i.e., reduced restrictions and duties on imports, creation of free-trade zones). However, there has not been a great deal of progress in this area, in part due to disagreements between reformers and conservatives.? In addition, foreign investors appear to be cautious about Iran due to uncertainties regarding its future direction under new leadership, as well as the ongoing, international standoff over the country. s nuclear program. In September 2005, Iran threatened to impose investment limits on countries opposing its right to access nuclear fuel cycle technology. In November 2005, Iran rejected a proposal by Russia and the EU whereby Russia would supply it with enriched uranium, as opposed to Iran enriching the uranium itself.

In June 2005, Iran held Presidential elections in which the conservative mayor of Tehran, Mahmoud Ahmadinejad, won a surprise victory. Ahmedinejad succeeded Mohammad Khatami, a moderate reformist, who had been President since August 1997. Ahmadinejad ran on a populist platform, pledging to fight poverty and corruption while creating new jobs in the public sector. Ahmedinejad also pledged to share the Iran. s oil wealth more broadly and to reduce the nation. s income gap between rich and poor. Since taking office in August 2005, Ahmedinejad has replaced numerous political appointees. However, as of early December 2005, the Majlis had rejected three of his nominees (Ali Saeedlou, Sadegh Mahsouli, and Mohsen Tasalloti) for oil minister, leaving the country. s all-important oil sector in limbo for the time being (and causing delays to a variety of projects). On December 4, 2005, President Ahmedinejad submitted the name of current caretaker and former deputy oil minister, Kazem Vaziri, to the Majlis. Vaziri was approved on December 12. On January 3, 2006, a shakeup at the oil ministry resulted in five new deputy ministers, including the one in charge of running the national oil company.

In March 2004, President Bush extended sanctions originally imposed in 1995 by President Clinton for another year, citing the "unusual and extraordinary threat" to U.S. national security posed by Iran. The 1995 executive orders prohibit U.S. companies and their foreign subsidiaries from conducting business with Iran, while banning any "contract for the financing of the development of petroleum resources located in Iran." ?In addition, the U.S. Iran-Libya Sanctions Act (ILSA) of 1996 (renewed for 5 more years in July 2001) imposes mandatory and discretionary sanctions on non-U.S. companies investing more than $20 million annually in the Iranian oil and natural gas sectors.