EGYPT INCREASES FUEL PRICES; PUBLIC REACTION MUTED

UNCLAS SECTION 01 OF 02 CAIRO 004596 SIPDIS SENSITIVE SIPDIS STATE FOR NEA/ELA E.O. 12958: N/A TAGS: ENRG ECON PGOV EG SUBJECT: EGYPT INCREASES FUEL PRICES; PUBLIC REACTION MUTED REF: CAIRO 4518 Sensitive but unclassified. Please protect accordingly. -------------- Summary -------------- ¶1. (SBU) Egypt made a small dent in its burdensome fuel subsidies on July 21 with price increases across a range of fuel products. The increases will be welcomed by multinational fuel retailers who have been operating on non-existent margins. Price gouging in the across the economy for derivative goods and services, if unchecked by the GOE, could inflame what has thus far been a tempered public reaction. End Summary. -------------- Fuel Price Increases -------------- ¶2. (SBU) Fulfilling Minister of Petroleum Sameh Fahmy's June 19 prediction (reftel),the GOE announced on July 21 that, effective immediately, it was raising the price of 90 octane gasoline in addition to other fuel products to include diesel, fuel oil, kerosene, and natural gas supplied to industry. While the percentage increases are significant, remaining subsidies still price Egyptian fuel products well below world market levels. The following price increases became effective on July 21: -- 90 Octane Gasoline from LE 1.00 (USD 17 cents) to LE 1.30 (USD 23 cents) per liter. The last price increase for 90 Octane gasoline was in June 1992. -- Diesel from LE .60 (USD 10 cents) to LE .75 (USD 13 cents) per liter. -- Fuel Oil ("Mazout") from LE 300 (USD 52) to LE 500 (USD 87) per ton -- Kerosene from LE .40 (USD 7 cents) to LE .70 (USD 12 cents) per liter -- Natural Gas supplied to factories (not regular commercial establishments) is expected to increase by up to 25 percent but the exact figure in not yet known. ¶3. (SBU) Based on our estimates, the price increases will save the GOE LE 3.5 billion (USD 609 million). The overall remaining subsidy amounts to at least LE 40 billion (USD 7 billion). According to World Bank estimates, Egypt's fuel subsidies in 2005/2006 were equivalent to 6.9 percent of GDP, up from 2.8 percent in 2000/2001. -------------- Public Reaction -------------- ¶4. (SBU) Aside from reported scuffles between cab drivers seeking to boost their fares and unenthusiastic passengers, we have not witnessed any violence in reaction to the price increases. The timing of the announcement, on the Friday Muslim Sabbath when most families remain at home prior to heading to the mosque for mid-day prayers, and preceding Egypt's National Day holiday when many taxi and truck drivers would be off, likely tempered the initial public response to the increase. While some press commentators remarked on the timing, the majority of public criticism leveled at the GOE asserts that the GOE had "lied" about not increasing prices. Although the announcement did not come until Friday July 21, word of the increase had leaked out by the evening of the 20th and Embassy officers noted long lines of motorists at local gas stations seeking one last fill-up at the old price. -------------- GOE Damage Control -------------- ¶5. (SBU) Rumors and prognoses about the effect the fuel price increases will have on consumer goods are being circulated in the press, and have prompted senior GOE officials to seek to reassure the public. Minister of Electricity Hassan Younes stated there will be no hike in electricity bills following the increase, while Minister of Interior Habib Al Adly, in an effort to stem potential price gouging, said the MoI will step up its supervision of the market and confront attempts to raise prices of related commodities and services. Even CAIRO 00004596 002 OF 002 prior to the increase, Minister of Finance Yousef Boutros Ghali sought to show how the rich benefited more than the poor from the gasoline subsidy. He said the subsidy benefited the rich to the tune of LE 1,700 (USD 296) per capita while the poor only gained LE 300 (USD 52) per capita, one explanation being that poorer Egyptians in general either didn't own cars, or own old and dilapidated cars that run on 80 octane gas. ¶6. (SBU) With the fuel prices coming on the heels of increases in the Metro (commuter train) ticket prices (single ticket fares rose from LE.75 to LE 1) and some road tolls, the GOE is also looking to counteract fears of other price increases on staple goods. The Ministry of Social Welfare announced that it was increasing the bread subsidy from LE 8 billion (USD 1.39 billion) to LE 9 billion (USD 1.57 billion) to offset any possible flow-through increases due to the rise in the cost of diesel. -------------- Benefits to Petroleum Industry -------------- ¶7. (SBU) As reported in reftel, fuel retailers, who have been operating with slim margins and not benefiting from world market pricing, have been pushing the GOE to increase prices for some time. Despite prices remaining well below market levels, the increase in 90 Octane Gasoline to the price they had predicted certainly provides space for a margin increase thereby improving their profitability outlook. The increase in the price of natural gas sold to industry may also benefit Egypt's growing natural gas sector by providing greater incentive for multinationals to invest in production and exploration. Stuart Fysh, Executive VP of British Gas, was recently quoted in the press as saying that Egypt's gas subsidies remove about two-thirds of the economic return, markedly reducing the attraction of investing risk capital in exploration in Egypt. -------------- Environmental Impact -------------- ¶8. (SBU) Aside from helping retailers' margins and decreasing the subsidy burden on the GOE, the price increases could provide some environmental benefit. Particularly in Egypt's rural areas, the deflated price of kerosene coupled with the 2004 increase in the diesel price led to a practice whereby some retailers were cutting diesel with the cheaper kerosene and then selling the mix as diesel at the higher price. Decreased efficiency and higher emissions resulted. Also, the pricing of 90 octane just below 92 octane could prompt a switch to the better performing fuel, in addition to modulating demand for gasoline overall. The increase in diesel prices over the last two years have also prompted switches to cleaner or more efficient power sources. Prior to the 2004 increase, for example, the diesel price was so low that some hotels preferred to run off of diesel generators rather than link into the electricity grid. -------------- Comment -------------- ¶9. (SBU) Although the price increases make only a small dent in Egypt's overall subsidy burden, they are a positive step and indicate a commitment on the GOE's part to address the issue. While being hit with some criticism, the GOE seems to have weathered the announcement well. If price gouging becomes widespread and is not checked by authorities, however, the public reaction could grow much stronger. RICCIARDONE