Identifier
Created
Classification
Origin
05AMMAN5228
2005-06-29 14:33:00
UNCLASSIFIED//FOR OFFICIAL USE ONLY
Embassy Amman
Cable title:  

FUEL PRICE INCREASES IN JORDAN ON THE HORIZON

Tags:  ENRG EPET EFIN ECON JO 
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P 291433Z JUN 05
FM AMEMBASSY AMMAN
TO RUEHC/SECSTATE WASHDC PRIORITY 3130
INFO RUEHHH/OPEC COLLECTIVE PRIORITY
RUEATRS/DEPT OF TREASURY WASHDC PRIORITY
UNCLAS SECTION 01 OF 02 AMMAN 005228 

SIPDIS

SENSITIVE

STATE FOR NEA/ELA
STATE ALSO FOR EB/ENR

E.O. 12958: N/A
TAGS: ENRG EPET EFIN ECON JO
SUBJECT: FUEL PRICE INCREASES IN JORDAN ON THE HORIZON

SENSITIVE BUT UNCLASSIFIED. FOR USG USE ONLY.

UNCLAS SECTION 01 OF 02 AMMAN 005228

SIPDIS

SENSITIVE

STATE FOR NEA/ELA
STATE ALSO FOR EB/ENR

E.O. 12958: N/A
TAGS: ENRG EPET EFIN ECON JO
SUBJECT: FUEL PRICE INCREASES IN JORDAN ON THE HORIZON

SENSITIVE BUT UNCLASSIFIED. FOR USG USE ONLY.


1. (U) SUMMARY: Royal Court Minister Marwan Muasher June
27 spoke briefly about lifting oil subsidies in remarks
carried prominently in most of the Arabic-language dailies.
It is only a matter of time before the first wave of oil and
gas price hikes are announced and implemented. Muasher's
remarks appear to be paving the way. As the Government of
Jordan (GOJ) considers when to initiate the removal of
subsidies on oil products, we review below the current GOJ
price structure and proposed pricing methodology, and detail
where the targets for subsidy removal (and price increases)
are, and some of the likely effects. Refined diesel gas for
vehicles and heating -- most produced at the Jordan Petroleum
Refinery -- accounts for the largest share of subsidies.
Increases in diesel prices will immediately affect commercial
transportation. In resource-poor Jordan, where most goods
including consumables are transported by truck, the price
rise will contribute to inflation in the near-term.
Residential heating, electricity generation and industries
will also be hit, but the effects may not appear for some
time. The significance of the impact will depend heavily on
the percentage of hikes chosen across a range of products.
END SUMMARY.


2. (SBU) Muasher was reviewing the wider national agenda
when he commented on the GOJ budget strains and the need to
address what one daily headlined as the "end of the oil
subsidy era." He said that the budget deficit due to oil
subsidies could prove "disastrous" and that the international
rise in crude oil prices had to be dealt with by the GOJ. A
separate article in daily Al Rai carried the government
Spokesperson's statement that the cabinet had discussed the
possibility of raising the price of fuel in Jordan. The same
article cited unnamed informed sources stating that the
cabinet had established a committee headed by the Minister of
Energy to discuss alternatives to oil subsidies under
different scenarios. (COMMENT: It appears that these
remarks were intended to lay the groundwork for an official
announcement regarding oil product price hikes sometime in
the near future, most likely after the new government is

sworn in and members of parliament give their public backing
to it. In fact, the cabinet has already decided to eliminate
the subsidies over a three-year period, starting with a 25
percent cut next month. END COMMENT.)

Diesel a Potential Big Target
--------------


3. (SBU) According to the Ministry of Energy (MOE),
subsidies applied to diesel account for $350 million of the
$550 million now allotted to oil subsidies under the revised
budget (this and all other figures in this message are based
on a crude oil price of $45 per barrel, "the current market
price"). Diesel is currently priced at 0.135 Jordanian
Dinars (JD) per liter, whereas the MOE calculates the price
would be 0.300 JD/liter at the current market price with no
subsidy. (The exchange rate has been stable at $1.41/1 JD.)
Last year, Jordanians consumed 1.75 million tons of diesel,
the largest share among eight major oil product categories.
The first of three diesel price hikes over the next 18 months
is likely to appear to be a "high percentage" according to an
MOE source, but only because the 0.135 JD base is so low
compared to the target 0.300 JD. (NOTE: If the price rose
about 32 percent in each of three increases, it would reach
the new 0.300 JD benchmark. A first price hike in the 20-32
percent range would be mathematically feasible, while still
allowing for balanced, nearly equivalent subsequent
increases, and spreading out the effects. END NOTE.)


4. (SBU) Fuel oil used by industries and to generate
electricity represents the second largest share of
consumption in Jordan, at 1.43 million tons in 2004. MOE
analysts say that fuel oil should not undergo as large an
increase, compared to diesel, because it has not been as
heavily subsidized.


5. (SBU) If diesel prices are raised, the added costs to
Jordan's extensive commercial transportation industry
(Transportation and Communications represent 19 percent of
GDP) would be felt by the average citizen. Jordan has few
natural resources and imports a wide range of consumables and
raw inputs for manufacturing. Transporting some $8.1 billion
in imports (73 percent of GDP) to population and
manufacturing centers in the north from distant Aqaba in the
south will contribute to a rise in domestic prices as costs
are passed to consumers in the near term. When consumers
purchase heating oil later this year, they will again
directly see the impact of the fuel increases on their lives.


6. (SBU) Similarly, the cost of generating electricity and
industrial production would go up. Those plants fired by
fuel oil may not see such a dramatic impact as those running
on diesel (see para 4). However, how and when those costs
are passed to the consumer would vary more widely than the
transportation-based and heating oil increases.

Aviation Fuel A Pass-Through?
--------------


7. (SBU) Jet fuel has a two tiered price scheme in Jordan.
Local companies (read Royal Jordanian) are now charged 0.190
JD per liter while all others are charged 0.290 JD/liter.
MOE sources say that these would be brought up to the current
market price (and to parity) in just two steps. The
percentage increase in "local company" jet fuel prices would
obviously be higher. Tour agency operators in Jordan
familiar with the pending adjustment have been warning
customers that already-purchased RJ tickets may see a
fuel-price-increase fee slapped on when the jet fuel price
hikes are implemented. (Post is faxing to NEA/ELA and EB/ENR
the current GOJ petroleum price list.)

Pricing Basis May be Stabilizing
--------------


8. (SBU) Also under review by the GOJ is the basis for oil
product pricing. The pricing methodology being favored,
according to informed MOE sources, is the "import parity"
basis. That is, the oil product pricing would be based on
the world crude oil prices (as given for an Aqaba port
delivery) plus tariffs, handling costs, and transport to the
point of sale. For example, if the price of diesel at the
pump near the Zarqa JO Petrol oil refinery is the baseline,
then the price of refined diesel transported to southern
Ma'an would be higher. This policy would remove another
hidden cost of fixing the price of fuels nationwide.


9. (SBU) COMMENT: We understand that GOJ policy makers are
reviewing extensive impact reports based on a wide range of
fuel price increase scenarios. While the "mix" of increases
across eight fuel categories that the GOJ finally chooses may
give some leeway in determining how and when the public feels
the effects, Minister Muasher's comment remains central to
the policy question: the Jordanian public must be prepared
to deal with the new subsidy-free era. The GOJ is now
embarking on its effort to inform the public and shape the
reaction while maintaining fiscal integrity. With world
crude prices hitting record levels, members of the Jordanian
public will have to learn to accept the simple economic facts
of life -- they must pay for their oil as they consume it.
It remains to be seen how ready they are and how much they
can accept.
HALE