SARG STUMBLING THROUGH FUEL CRISIS

C O N F I D E N T I A L DAMASCUS 000073

SIPDIS

SIPDIS

STATE FOR NEA/ELA; NSC FOR ABRAMS/SINGH

E.O. 12958: DECL: 01/31/2018
TAGS: ECON ENRG EPET PGOV SY KCOR
SUBJECT: SARG STUMBLING THROUGH FUEL CRISIS

REF: 07 DAMASCUS 949

Classified By: Charge d'Affaires Todd Holmstrom for reasons 1.4(b,d)

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SUMMARY
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1. (C) Unseasonably cold weather, perhaps the coldest January
in the last decade, has increased Syrian demand for heating
fuels. Anecdotal information from Syrians, and our own
observations, convey a situation in which increased demand,
particularly for diesel (mazout),has exhausted supplies and
driven black market prices up beyond the SARG's ability to
control. The resulting shortage has led to significant
public criticism of the government, both for its management
of this crisis and for the on-going debate over lifting fuel
subsidies. The SARG's response has been to alternately deny
that there is a problem, then blame smugglers, and finally to
admit that increased demand has placed unprecedented strain
on supplies. Industry sources tell us that the SARG simply
failed to plan for the increased demand and did not place
sufficient orders to meet it. The crisis is having a
cumulative effect as people turn to alternative energy
sources -- such as butane gas and electricity -- which are
also experiencing inflation and shortages. Speculation among
informed sources is that the SARG may use this situation to
condition the public to higher prices before lifting diesel
subsidies when warmer weather arrives.

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A PERFECT STORM GATHERS
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2. (U) In early January, Syrian police suddenly closed
approximately 60-100 privately-operated gas stations
throughout the country. At the time, the SARG justified this
action as part of an on-going campaign to crack down on the
rampant smuggling of subsidized Syrian diesel to neighboring
countries, where it is sold at market prices -- five times
the subsidized Syrian price. (Note: Diesel is the primary
fuel for home heating in Syria. End note.) By the second week
of January, fuel lines appeared at government-run gas
stations, with reports of customers being limited to
purchasing 20 liters of mazout per person. As the
exceptionally cold weather persisted for a third week,
Syrians were shocked when diesel distributors began refusing
requests to re-fill home tanks that had not yet run dry.
Those Syrians fortunate enough to receive a visit from a
mazout truck were charged from 10.5 to 12 Syrian Pounds (SYP)
per liter, a 40-60 percent increase over the government-fixed
price of 7.4 SYP/liter. Unable to afford mazout at this
price, many poor Syrians have turned to alternative fuels for
home heat -- including butane, shredded tires, and fuel oil
mixed with saw dust.

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SUBSIDY ISSUE AGAIN IN PLAY
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3. (U) Dormant since September 2007 (ref A),rumors
resurfaced in mid-January that the SARG would soon lift
subsidies on petroleum by-products. Local media reported
that the SARG Economic Committee had endorsed a plan to
replace mazout subsidies with family ration cards as early as
February 2008. Under this plan, the first 500 liters would
cost 7.5 SYP per liter, and the next 500 liters would cost
9.5 SYP. Any subsequent mazout purchases would be sold at
the market price of 25 SYP (USD 0.50) per liter. As the
average "middle class" Syrian family uses approximately
4000-5000 liters of mazout each winter, this increase would
have a significant economic impact.

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"DEMOCRACY" IN ACTION
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4. (U) Public outrage over the shortages and the ration card
rumors has largely been reflected in local media coverage.
On January 21, the government-owned daily Tishreen led with
the headline, "No butane, no mazout, no electricity and no
firewood...have mercy on us!" One quasi-independent business
newspaper, Al Iqtissadiyah, blamed the crisis squarely on
SARG officials for hinting that fuel subsidies might soon be
cut, claiming that such rumors convinced distributors to
hoard remaining supplies until the higher prices were
enacted. An editorial in the same publication essentially
begged the SARG to go ahead and raise the price just so
supplies would again be made available.


5. (U) Responding to the criticism, the SARG announced on
January 31 that 50 million SYP worth of diesel destined for
Iraq had been confiscated at the Al Tanf border crossing over
the past three weeks. Petroleum Minister Sufian Allaw then
attempted to justify the crisis by claiming that Syrian
demand for mazout had increased by 10 percent this month from
January 2007. Finally, an unnamed government official leaked
a rumor that foreign, private companies would soon be allowed
to operate gas stations in Syria, and that Kuwaiti and Qatari
companies had already submitted offers.

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NO CONSPIRACY, JUST BAD GOVERNANCE
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6. (C) According to one industry expert with access to the
Petroleum Minister, the SARG simply did not anticipate the
colder weather (and consequent higher mazout consumption
rate),and therefore did not order sufficient supplies from
Syria's primary exporters -- Italy (57 percent),Malta,
Bulgaria and Turkey. The cold weather has also closed the
ports of Banyas, Tartous and Lattakia, which has further
delayed distribution efforts for supplies that have already
arrived in country. Our contact said that the port closures
have also necessitated the cutting of Syrian oil production
for export due to lack of storage facilities -- further
exacerbating the problem.

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COMMENT
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7. (C) The current crisis is compounded by the SARG's
inexperience in managing fuel supplies since becoming a net
importer of refined products in 2007. In the political
realm, there remains a power struggle between reformers who
are focused on the social and economic costs of continuing
price supports versus entrenched Ba'ath Party interests
loathe to cede control to the free market. The SARG could
use this crisis to lower subsidies once supplies return to
normal, as some predict, which would provide some relief to
its overburdened budget. More likely, the SARG's continued
mismanagement of the crisis will feed growing public
discontent over the government's perceived indifference to
the average Syrian's welfare. The government's handling of
this crisis does not bode well for its ability to manage the
expected shortage of electricity resulting from a likely
summer surge in demand.
HOLMSTROM