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