PRICE HIKE FEARS LEAD TO DIESEL SHORTAGES

UNCLAS ALGIERS 001035 SIPDIS SIPDIS E.O. 12958: N/A TAGS: ECON EPET KNRG AG SUBJECT: PRICE HIKE FEARS LEAD TO DIESEL SHORTAGES REF: 06 ALGIERS 01961 (NOTAL) ¶1. Rumors that private gas distributors would strike in response to an expected cut in state subsidies of diesel prices led to fuel shortages and long lines at filling stations throughout Algiers beginning July 11. Private distributorships have accounted for roughly half of the filling stations in Algeria since the opening of the market in 2001, but all gasoline is supplied by the state-run refiner Naftal. Beginning July 13, Naftal deployed additional oil distribution trucks and demanded filling continue into the evening, alleviating some but not all shortages. Nonetheless, the uncertainty about price hikes has sparked even greater demand, as privately owned stations have attempted to fill all of their reserves so as to maximize profits in the event the government raises prices at a later date. GOVERNMENT SIGNALS PRICE HIKE, THEN DENIES CURRENT SHORTAGES -------------- ¶2. The scramble at the pumps follows Energy Minister Khelil's announcement July 14 that Algeria would reduce diesel subsidies in ¶2008. Khelil called the unspecified diesel price hike "a strategic and inescapable option" to limit foreign diesel imports, which have cost Algeria an estimated USD 52 million so far this year. Khelil also suggested that the cut signals an effort by the GOA to support more environmentally friendly fuels, such as unleaded gasoline and liquefied petroleum gas. Although Khelil did not say how much diesel prices would rise, the owner of a Naftal station in Algiers said prices last rose by 15 percent in 2006. ¶3. The GOA has attempted to portray the shortages as the normal result of increased demand during the summer travel season, when European emigres travel back to Algeria to visit family members. A representative for Naftal told the Algerian press that "there is no shortage of gasoline." However, Algerian consumers told us that the magnitude of shortages is already more severe than last summer. DIESEL DEMAND RISING -------------- ¶4. Domestic supply and demand factors offer a clearer explanation of Algeria's move to limit diesel imports than environmental considerations alone. Algerian diesel consumption has increased by 10 percent each year since 2000, according the Ministry of Energy. Algerian domestic refining capacity has been unable to keep up with this demand, however, as a growing share of Algerian consumers has shifted from gasoline-powered French cars to diesel engines, which now account for 31 percent of the Algerian market. This change in consumers' preference has in turn likely been a function of the notable discrepancy between diesel and unleaded fuel prices in Algeria (USD 0.17 verses USD 0.32 per liter, respectively). COMMENT: NO MORE SUBSIDIES TO CHINESE BULLDOZERS -------------- --- ¶5. While the government's denial of current shortages has hardly been convincing, its swift move to replenish stocks appears to have contained the panic and frustration more rampant at Algerian gas pumps a few days ago. In the longer run, overhauls underway at the Skikda and Arzew refineries (reftel),coupled with the construction of a new refinery in Adrar and plans to build another facility in Tiaret, are slated to increase Algeria's domestic refining capacity. While some diesel-driving Algerian consumers will face higher prices at the pump, it will be foreign contractors who are implementing Algeria's USD 100 billion infrastructure program that will most feel the pinch. The Chinese contractors working on the East-West highway project alone employ some 600 pieces of diesel-guzzling heavy equipment. DAUGHTON