Honduras: Public Unrest Over Gasoline Price

UNCLAS SECTION 01 OF 02 TEGUCIGALPA 001851

SIPDIS

STATE FOR WHA/CEN, WHA/EPSC, EB/ESC, CA/OCS, AND DRL/IL
STATE PASS TO USAID, OPIC, EXIM, USTR
COMMERCE FOR MSEIGELMAN
TREASURY FOR DDOUGLAS
ENERGY FOR IA
DOL FOR ILAB

E.O. 12958: N/A
TAGS: EPET ENRG EINV ELAB ECON PGOV CASC ASEC HO
SUBJECT: Honduras: Public Unrest Over Gasoline Price
Spike; Partial Price Reduction Fails to Halt Strikes

REF: A: Tegucigalpa 1837

B: Tegucigalpa 1842


1. Summary: Unusually effective strikes by taxi drivers hit
major urban centers on September 6-7, following a 25 percent
increase in gasoline prices in the wake of Hurricane
Katrina. Whether prompted by easing markets or political
pressure, the GOH walked back nearly half of the increase on
September 6. The two leading presidential candidates and
leading opposition figures have come out against the
increase, while the GOH maintains the increases are
necessary. To ease the impact on Honduran workers,
President Ricardo Maduro has proposed and private enterprise
has resisted a one-time salary bonus to all workers. End
Summary


2. Reacting to spot-market price spikes following Hurricane
Katrina damage to key U.S. Gulf coast refineries, the GOH
raised domestic gasoline prices September 6 by 17 lempira
(25 percent) to 85 lempiras (approximately USD 4.50).
Gasoline prices in Honduras are set by the GOH, based on a
complex formula that adjusts periodically to market swings,
while also guaranteeing profit margins to importers,
transport companies, and distributors. International
Monetary Fund resident Representative Hunter Monroe told
EconChief on September 7 that when the spot prices for
gasoline began to fall again over the weekend, application
of this formula led the GOH to reduce the price by 7 Lempira
(about U.S. 40 cents). While most observers assumed this
price cut to be a reaction to public outcry against the
sharp price hike, Monroe was confident the reduction was the
result of technical adjustments rather than politics. As of
September 6 (prior to the reduction) Honduran gas prices
were the highest in Central America.


3. The GOH receives over 40% of its approximately 35,000 to
40,000 barrels per day of petroleum products from the U.S.,
mainly from Gulf coast refineries. In addition to knocking
out eight major refineries on the coast, Hurricane Katrina
took down two key fuel pipelines. While the pipelines are
now back at full capacity, the outages caused product
shortages at terminals along those pipelines. The six main
gasoline companies in Honduras (Esso, Shell, Texaco, Dippsa,
Hondupetrol, Gas del Caribe) normally maintain a two-week
reserve supply per Honduran law.


4. Even at spot prices, the prices for these gasoline
reserves -- purchased over the last two weeks -- were much
lower than current prices. On this basis, opposition and
community leaders were quick to denounce the prompt price
increases at the pumps, in the belief that these represent
windfall profits for the "multinational companies."
Catholic Church Cardinal Oscar Andrs Rodrguez called the
increase "unethical", while both Liberal Party presidential
candidate Manuel "Mel" Zelaya and National party
presidential candidate Porfirio "Pepe" Lobo called for
immediate reductions in gasoline prices. In response,
Minister of Industry and Commerce Irving Guerrero reiterated
that the GOH must not sacrifice fiscal responsibility,
calling the situation "too complex for the people" while
emphasizing that the GOH was "not a political but a
technical government" and that they will not be drawn in by
"demagogy". (Comment: Post does not believe the gas stations
s
are making windfall profits, as the higher prices charged
today are used as operating capital to purchase new (more
expensive) gasoline supplies tomorrow, resulting in no net
gain to the distributor beyond his normal profit. End
Comment.)


5. In reaction to the price hikes, taxi and bus drivers went
on strike throughout the country on Tuesday Sept 6, with
hundreds of taxis in Tegucigalpa blocking intersections and
the main highways in and out of the city. The drivers are
protesting higher fuel prices and calling for a reduction in
pump prices and an increase in taxi fares. The protest has
been largely non-violent, though Post has received reports
of isolated vandalism and rock throwing at cars attempting
to navigate blocked roads throughout the day (ref A). The
strike continued through September 7, with the president of
the Public Transit Association indicating the length of the
strike "depends on how seriously the government wants to
negotiate." A meeting is scheduled for the afternoon of
September 7 at 4pm between Minister of Transportation and
Public Works Jorge Carranza and the striking taxi drivers.
(Comment: Post anticipates this meeting will yield a taxi
fare surcharge to offset higher fuel costs. End Comment.)


6. Private industry took a strong position against the price
increases, with the president of the National Industries
Association Adolfo Facusse stating the latest reduction was
too little too late, and did not mirror the recent reduction
in world prices. President Ricardo Maduro's recent
initiative to force private industry to defray price
increases for their workers by paying a one-time salary
"bonus" (ref B) has also angered industry. Added to their
own higher energy costs, industrialists fear the bonus
payments would force layoffs or even business closings.
Jesus Canahuati, the President of the Honduran Maquiladores
Association, said that if industry is forced to pay the
bonuses, "the cure would be more expensive then the
sickness."


7. Comment: Energy prices continue to provide grist for the
electoral mill, as Honduras approaches its November 27
presidential and Congressional elections. Candidates of all
stripes have proposed several unwise populist quick-fixes to
the energy crisis, including cutting energy taxes,
eliminating fuel surcharges, encouraging the state to
nationalize and monopolize fuel purchases, reopening
existing energy contracts with a view to reducing previously
agreed pricing structures, and, most recently, requiring the
private sector to pay salary bonuses to help workers face
rising energy costs. The GOH is also undertaking other,
more measured policies, such as expanding targeted
electricity subsidies for the poor, and transportation
subsidies for the poor and for students. Post and the IMF
continue to watch events with interest, and will seek to
ensure that GOH policies neither wreak havoc with carefully
crafted fiscal disciplines nor prejudice foreign investors
with signed and sealed contracts. End Comment.

Williard