NINEWA: BETTER SUPPLY AND MANAGEMENT REDUCE SOME

C O N F I D E N T I A L SECTION 01 OF 02 BAGHDAD 000035

SIPDIS

SIPDIS

E.O. 12958: DECL: 01/03/2017
TAGS: ECON EPET ENRG PGOV IZ
SUBJECT: NINEWA: BETTER SUPPLY AND MANAGEMENT REDUCE SOME
BLACK MARKET FUEL PRICES

Classified By: Acting Political Counselor Rob Waller for reasons 1.4 (b
,d).

This is a Ninewa Provincial Reconstruction Team (PRT) message.


1. (C/REL AUS, GBR, CAN) Summary: Black market benzene and
diesel prices in Mosul have fallen since August but still
remain above the government price for each fuel. Increases
in benzene supply, a slight seasonal reduction in benzene
demand, and improved Iraqi discipline and management of fuel
distribution are some of the factors contributing to the
lower prices. Winter demand kept the kerosene black market
price consistently high through December. The long-term
solutions to meeting local demand and reducing black market
profitability and corruption include increased fuel supply
through imports and parity between official and world fuel
prices.

Benzene and Diesel Prices Fall, Kerosene Remains High
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2. (C/REL AUS, GBR, CAN) The average black market price for
regular benzene in Mosul fell from Iraqi Dinar (ID) 925/liter
(USD 0.74) in mid-August 2007 to about ID 700/liter (USD
0.56) in mid-December 2007, according to Coalition Force
surveys and Oil Products Distribution Company-Northern Branch
(OPDC) statistics. Mosul residents reported that over the
same period the quoted government price for a liter of
benzene rose from ID 350/liter (USD 0.28) to ID 500 (approx.
USD 0.40). Benzene delivery from the Baiji Oil Refinery
(BOR) increased at least 35 percent during the same time
period.


3. (C/REL AUS, GBR, CAN) The average black market diesel
price in Mosul fell from ID 700/liter (USD 0.56) in
mid-August to ID 633/liter (USD 0.51) in mid-December, while
the quoted government price stayed constant at ID 400/liter
(USD 0.32). Diesel delivery decreased 18 percent during the
time period.


4. (C/REL AUS, GBR, CAN) Kerosene prices in Mosul began in
August at ID 769/liter (USD 0.62),moved up to about ID
825/liter (USD 0.66) in September and October and dropped
back to only ID 700/liter in December, compared to a quoted
government price increase over the same period from ID
150/liter (USD 0.12) to ID 200/liter (USD 0.16). Kerosene
delivery from the BOR tripled between August and December.


5. (C/REL AUS, GBR, CAN) Businessmen, farmers and government
officials from Mosul and outlying areas of western, southern
and eastern Ninewa corroborated the statistical picture of
falling benzene and diesel black market prices. These PRT
contacts reported that queues were shorter and black market
prices were down for benzene and diesel. However, kerosene
prices and shortages remained high or increased over the same
period.

Improved Iraqi Administration Stretches Meager Supply
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6. (C/REL AUS, GBR, CAN) OPDC-Northern Branch General
Manager Mohamed al Zibari, who oversees fuel distribution for
northern Iraq, has worked closely since September with the
Mayor of Mosul, where two-thirds of Ninewa's three million
people live, to enforce discipline in the fuel distribution
system. Working from an OPDC-Northern Branch schedule of
deliveries, provincial officials followed up to check
stations' supplies on hand and hours of operation. In
November alone, 25 gas stations were closed or fined for
pulling fuel out of the official system and selling it at
inflated prices on the black market, al Zibari said. Al
Zibari and the Mosul Mayor said they would like to replicate
their enforcement system in the rest of the province.


7. (C/REL AUS, GBR, CAN) Al Zibari attributed some of this
year's drop in the black market benzene price to increased
consumer confidence as they recognized better accountability
in the fuel distribution system. This increased
predictability, coupled with the increased benzene supply,
reduced the need for consumers to grab any available benzene
at exorbitant black market prices. Alternatively, the
kerosene market saw continued high prices because the
increased supply from the BOR was overshadowed by Ninewa
residents' increased demand for their perceived winter needs.
Ninewa residents told the PRT in the fall of 2007 that they
planned to stockpile kerosene at up to three times the
government price, contributing to a bidding war that
reinforced black market profitability.

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Businessmen Would Trade Higher Prices for More Supply
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8. (C/REL AUS, GBR, CAN) Operating at full capacity, without
restricted credit or security fears, Ninewa's economy would
require 3 million liters/day of benzene, al Zibari said,
based on estimates of personal and vehicle fuel usage. In
the current restrictive security and economic environment, he
said the province only needed slightly more than the 1.1
million liters/day of benzene that it received. As security
and economic conditions improve, though, Iraqi officials
would need much more benzene, diesel and kerosene, a demand
Al Zibari said imports at the world price for each would have
to meet.


9. (C/REL AUS, GBR, CAN) Business owners and investors
across Ninewa told the PRT in fall 2007 that they understood
how the disparity between the official and black market fuel
prices encouraged corruption. They endorsed an increase in
the official fuel price, with the understanding that the
higher official price would attract increased private imports
and reduce the black market's profitability. They
acknowledged that about one-quarter of Ninewa residents
relied on the current officially priced fuel, for which they
might wait in line seven days. Few businesses or farmers
could afford to wait so long for fuel, no matter how cheap,
the Ninewa entrepreneurs said.

Comment: Increased Imports and Price Parity
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10. (C/REL AUS, GBR, CAN) While administrative improvements
at the OPDC-Northern Branch are a good sign for GOI capacity,
they will not solve the underlying problems in Iraqi fuel
distribution: lack of sufficient supply and disparity between
black market and government prices. Iraqi refineries are
unlikely in the short term to triple domestic supply,
indicating that government or private imports must meet
Iraqis' needs both during this winter's kerosene crunch and
as the country's improving security demands more benzene for
a growing economy. If the government markets imports at the
world price, it would meet the terms of the International
Monetary Fund agreement with Iraq.


11. (SBU) Simultaneously, official Iraqi fuel prices should
be allowed to match the world price, incentivizing private
importers and eliminating black marketers' windfall gain.
Such a policy would help eliminate black market-driven
corruption and provide a more steady supply of fuel to the
businesses that need it to power Ninewa's economy. However,
increased official fuel prices would be politically untenable
unless a system, such as the Social Safety Net, continued to
provide for the poorest 25 percent of society that relies on
cheap fuel.
CROCKER