IRAQI FUEL PRICES RISES -- FACT AND FICTION

C O N F I D E N T I A L SECTION 01 OF 02 BAGHDAD 004466 SIPDIS E.O. 12958: DECL: 10/28/2015 TAGS: ECON ENRG EPET EFIN PGOV PREL IZ SUBJECT: IRAQI FUEL PRICES RISES -- FACT AND FICTION REF: A. BAGHDAD 4407 ¶B. BAGHDAD 4335 ¶C. BAGHDAD 3989 ¶D. BAGHDAD 3988 Classified By: Economic Minister Counselor Tom Delare for reasons 1.4 ( b) and (d). ¶1. (C) Summary: Attention by the IMF to fuel price increases as one of several criteria for the Standby Arrangement with the IMF suggests that an explanation of the real fuel price situation might be useful. First, the Council of Ministers (CoM) decision of October 6 raising fuel prices effective December 31, 2005, largely sanctioned the unofficial price increases that had been underway since September. This may impact the state budget, as the proceeds of the unofficial increases have thus far been largely reflected in the State Oil Distribution Company's balance sheets rather than government coffers. Finally, another CoM decision allowing private sector involvement in the refining and importation of petroleum products is viewed as a positive step towards marketization, but it does not provide profit margins for operators. End Summary. -------------- Council of Ministers Acts -------------- ¶2. (SBU) The Council of Ministers (CoM) decided October 6 to raise consumer fuel prices in Iraq. According to the decision, effective December 31, 2005, prices will rise as follows (1500 ID=$1.00, as per MinFin and IMF common usage): Current Price Dec 31, 2005 Price ID/liter and $/gallon ID/liter and $/gallon Regular Gas 20 ID/$.05 50 ID/$.13 Premium Gas 50 ID/$.13 150 ID/$.38 Kerosene 5 ID/$.01 10 ID/$.03 Diesel 10 ID/$.03 30 ID/$.08 LPG 250 ID/$.50 500 ID/$1.26 (Note: LPG is most often sold in 12kg cylinders. The current price per cylinder is $.63 and will increase to $1.27/cylinder December 31. End Note). A second decision recommended a $340 million (500 billion dinar) subsidy for the poor and unemployed, effective November 30, 2005, and also recommended private sector involvement in the import and refining of petroleum products. -------------- The Situation on the Ground -------------- ¶3. (C) When asked about the CoM decision to raise prices, the Director General of the State Oil Distribution Company, Zuhayr al-Shakir, laughingly told Econoff October 26 "I have already done all that," referring to "unofficial" price increases he implemented for regular gasoline (from $.05 to $.13 per gallon) in the majority of Iraqi cities (refs B and C). (Note: The new price was noted in Dohuk province the week of October 24. End Note). There has been no adverse public reaction to the de facto price increases, Zuhayr said, but the ongoing fuel shortages are a source of concern. Despite this, Zuhayr said because the GOI is afraid to take or publicize official action to raise prices, they are waiting to implement their decision until two weeks after the election. ¶4. (C) Zuhayr said that, in view of the option of home delivery under the winter fuel program (ref C),"People are already used to these prices." Furthermore, the prices for fuel purchases over the amount authorized for the winter fuel ration are higher even than those authorized by the CoM for December. For example, kerosene that sells for just over a penny per gallon via the subsidized coupon system, already costs the equivalent of $.06/gallon if it is delivered, and $.26/gallon for purchases in excess of a family's allotment at MoO distribution sites. Similarly, diesel that sells for approximately $.03/gallon at service stations is being sold at mobile stations for as high as $.26/gallon. Zuhayr said that gasoline is selling for as much as $.51/gallon at stations within five kilometers of the Iraqi border in an effort to keep fuel in the country rather than being smuggled out for resale abroad. Black market prices are even higher (ref B). ¶5. (SBU) Word of the price increases has hit the papers and local television in Iraq, but has generated little public reaction. Given what people already are paying - when they can find the fuel they need - many Iraqis appear to have thus far greeted the news with a shrug. -------------- CoM Sufficient: No TNA Action Required -------------- ¶6. (C) Transitional National Assembly member (and former Minister of Oil) Thamir Ghadban told Econoff October 28 that no TNA action was required to enact the October 6 CoM price increases. Although the CoM could send the decision to the TNA for action in order to "cover itself" if it so desired, the fact that the CoM had sent both decisions directly to the ministries and other elements of the government in his opinion superseded the necessity of any subsequent legislative action. ¶7. (C) Regarding the draft law on the liberalization of fuel imports (ref D),Ghadban said that the Economic Committee of which he is a member had not received the draft. He indicated that he would follow up and check on the draft law's status. Based upon his reading of the CoM decisions of October 6, however, Ghadban said that the CoM decision would obviate the need for TNA action make the liberalization of imports effective. (Note: Ghadban's understanding conflicts with current Iraqi law, which suggests that government action to liberalize the import monopoly must occur through the legislative process. Post is studying this issue. End Note). If TNA action were required, Ghadban added, it would be unlikely to happen this year in any event. Due to Ramadan, the backlog of legislation upon which the TNA must act is immense. Furthermore, reported Ghadban, legislators would be only partially engaged at best, because many of them would be campaigning in the run-up to the December 15 elections. Despite Ghadban's opinion to the contrary as to the necessity, the IMF has requested that the TNA approve any CoM activity to liberalize imports (ref A). ¶8. (C) Ghadban said that, as Minister of Oil under the previous government, he had pushed hard, though unsuccessfully, for price increases and to remove the government from the business of importing gasoline and diesel. Kerosene and LPG must remain under government control (albeit at modestly increased prices),Ghadban asserted, because the poor depend heavily upon these fuels for heating and cooking. Ghadban's approach reflects the approach the GOI is taking in its current draft law. -------------- Reality Check -------------- ¶9. (C) Comment: The fuel prices recommended by the IMF (ref A) are effectively an acknowledgment of Iraqi reality on the ground; many Iraqis already pay prices that are much higher than the proposed increase. The more important question is whether the GOI or the distributors (including the State Oil Distribution Company) receive the additional funds from the new prices. Fuel produced and sold by the state-owned refineries to the distribution company can now be sold for higher prices and will provide added income for the State Oil Products Distribution Company, which is using the proceeds to keep its balance sheets in the black and to carry out necessary capital upgrades. In theory, this entire amount could be remitted back to the government (estimates vary from $250 to $400 million). Under current practice, however, this is unlikely to happen - the GOI receives a flat rate of just under $.03/gallon (11 ID/liter) rather than a percentage of the selling price, and share of the company's "profits." The Distribution Company, which has been selling at a loss for years, is only beginning to see a modest positive return. ¶10. (C) Comment cont'd: It is unclear how many - if any - private and foreign firms will rush to import and distribute fuel once the draft law is finally effected. Under the current regulations, the GOI limits station owners to profit margins of under half a penny per gallon; these firms would have to sell gasoline at a landed cost (the cost of the fuel plus its transport to Baghdad) of no less than $1.77/gallon (approximately 700 ID/liter) in order simply to break even. This regulation must be amended for the private sector to take advantage of any change in the law. In our view, the changes in price levels and the liberalization of imports are both too modest to guarantee change in market operation. Satterfield