ERITREAN FUEL DYNAMICS

C O N F I D E N T I A L SECTION 01 OF 02 ASMARA 000312

SIPDIS

DEPARTMENT FOR AF/E,
LONDON AND PARIS FOR AFRICA WATCHERS

E.O. 12958: DECL: 06/11/2018
TAGS: ECON PGOV ENRG PINR ER
SUBJECT: ERITREAN FUEL DYNAMICS

REF: ASMARA 300

Classified By: Ambassador Ronald K. McMullen for Reason 1.4 (d)


1. Summary: A confluence of internal and external factors
has resulted in a diesel fuel shortage in Eritrea since
December. The overall quantity of fuel imports, most
especially diesel and gasoline, have declined over the past
five years. Eritrea continues to subsidize the sale of
diesel, in contrast with the market approximating price of
readily available gasoline. Post concludes that diesel
shortages are driven by both global economic conditions and
internal problems inherent in a command-economy, rather than
by a deliberate policy to restrict the movements of
foreigners (other than a few notable exceptions). End
Summary.

POST ANALYSIS
--------------

2. (C) Eritrea's fuel sector is state-dominated, with the
Government of the State of Eritrea (GSE) determining through
the Petroleum Corporation of Eritrea (PCE) the type and
quantity of fuel imported and to whom it is allocated. The
GSE must, therefore, allocate its own hard currency reserves
for imports. Recent IMF reports indicate Eritrea maintains
at best two to four weeks of hard currency reserves, but some
post sources believe current reserves may actually be less.
Since the GSE has a finite amount of hard currency available,
recent global increases of fuel prices must lead to either a
sharp reduction in the amount of fuel imported or the
reallocation of hard currency from lesser GSE priorities.
IMF-published statistics obtained from the PCE (summarized in
paragraph 5) show that Eritrea imported 43% less diesel in
2007 compared to 2003; 37,820,000 vs. 21,700,000 gallons.
This sharp decrease in imports correlates with global market
price increases over the same period.


3. (C) The GSE subsidizes diesel sales at below the cost of
purchase and transport, despite the tripling of the retail
price since 2003. Diesel is priced at $6.32/gallon for all
customers, including resident diplomatic missions and
international organizations. The GSE implemented rationing
in conjunction with subsidies, presumably to prevent black
marketeering. Despite these policies, the GSE is unable to
provide diesel fuel to commmercial customers. The current
price of gasoline, $9.59/gallon, accurately reflects the
market price. Therefore, gasoline is more readily available
commercially, despite the relatively more severe decrease in
the quantity imported since 2003 (63% decline, vs. 43% for
diesel). Post has yet to discover a rational explanation for
the GSE's disparate handling of these two commodities.


4. (C) Comment: Post concludes the general lack of diesel
in Eritrea is a combination of substantial increases in
global prices, insufficient hard currency reserves, a
government-run import monopoly, and a below-cost selling
price. While some speculate the GSE rations diesel as
another method to control the movement of foreign diplomatic
missions and organizations, the statistics argue that
movement control is a side effect of overall poor
macroeconomic conditions and misguided government policies
rather than a primary targeted motive. (Note: Post believes
the cutoff to UNMEE in January was an exception based on a
GSE political decision. Other UN organizations have not
received their fuel allocation for over two months, but the
extent to which the decision is politically motivated remains
unclear. End Note.) For example, the U.S. Embassy is likely
the GSE's least trusted diplomatic mission in Asmara, yet we
still receive our full diesel allocation, whereas other
diplomatic missions and international organizations have not
received fuel since December. If the GSE's policy was to
control the movements of foreigners by rationing diesel, it's
probable that the U.S. Embassy would have been one of the
first to feel the pinch rather than (potentially) one of the
last. End Comment.


5. (U) ERITREAN FUEL IMPORT STATISTICS, 2003 TO 2007
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2003 - expressed in 1,000s of gallons
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4960 - gasoline

ASMARA 00000312 002 OF 002


5890 ) kerosene
2480 ) jet fuel
37820 ) diesel
13330 ) heavy fuel oil
4340 ) other
68820 - total

2007 - expressed in 1,000s of gallons
--------------
1860 - gasoline ) 63% decrease
1860 - kerosene - 58% decrease
5890 - jet fuel - 138% increase
21700 - diesel - 43% decrease
15500 - heavy fuel oil - 16% increase
1240 - other - 71% decrease
48050 - total - 30% decrease
MCMULLEN