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.

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Summary
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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.

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Fuel Price Increases
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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.

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Public Reaction
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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.

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GOE Damage Control
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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

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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.

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Benefits to Petroleum Industry
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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.

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Environmental Impact
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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.

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Comment
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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.
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