DIESEL PROBLEM MORE CRISIS OF SUPPLY THAN PRICE

C O N F I D E N T I A L SANAA 001461

SIPDIS

EEB/ESC/IEC/EPC FOR MATTHEW MCMANUS
AMEMBASSY NAIROBI FOR SOMALIA AFFAIRS UNIT
DEPARTMENT FOR NEA/ARP FOR AMACDONALD

E.O. 12958: DECL: 08/27/2018
TAGS: EAID ECON ENRG EPET PGOV DJ SA SO SU YM
SUBJECT: DIESEL PROBLEM MORE CRISIS OF SUPPLY THAN PRICE

REF: A. 05 SANAA 1976

B. 07 SANAA 1210

Classified By: CDA Angie Bryan for reasons 1.4 (b) and (d)


1. (C) SUMMARY: Persistent diesel shortages attributed to
high demand, low refinery capacity and corruption have
plagued Yemen since May 2008. As a result, the ROYG has
decided to take a number of measures to increase diesel
supply. The high international price of oil has forced the
ROYG to pursue a step-by-step lifting of oil subsidies over a
period of three years, beginning with diesel fuel subsidies
for cement and iron factories on August 9. In spite of these
efforts, it is unlikely that the diesel shortage and related
high prices will end anytime soon. END SUMMARY


2. (U) Yemen has experienced widespread diesel fuel
shortages since May 2008, with owners of agricultural
machinery, trucks and bakeries suffering the most. There are
long lines at most gas stations, and diesel supplies usually
last only two-to-three hours each day. World Bank senior
economist Ali Abdulrizq told Econoff on August 23 that that
the problem is more acute in the southern port city of Aden.
According to media reports, the diesel fuel shortage became
so severe in Aden on August 19 that it prompted Aden Governor
Adnan Omar al-Jafari to pay a visit to the Yemen Petroleum
Company (YPC),which in turn pumped an additional 600,000
liters of diesel fuel into gas stations. Problems have also
occurred in Dhale and Ibb. Local contacts on the ground in
Ibb informed Econoff on August 25 of a major gasoline and
diesel shortage and noted that most gas stations had no fuel
to sell. (Note: Local supplies of diesel and gasoline
traditionally run out in Ibb right before Ramadan as it is a
popular tourist destination during that period. Ramadan
began on September 1. End note.)

SUPPLY OF DIESEL AFFECTED BY HIGH DEMAND, LIMITED CAPACITY
AND CORRUPTION
-------------- --------------


3. (C) One of the main causes of the shortage is the
failure of supply to keep up with demand. In an August 24
meeting with Econoff, the Advisor to YPC's Director General
of Foreign Affairs, Mohammed Alsefyari, explained that the
supply of diesel in Yemen has remained flat at 243,000 tons
between 2006-08, while demand has increased. Alsefyari
indicated that Yemen would need an additional 240,000 tons
per year in order to fill the gap.


4. (C) Limited domestic refining capacity is also a factor
in the diesel shortage. According to World Bank economist
Ali Abdulrizq, the nation's two refineries in Aden and Mareb
produce only 130,000 bpd and are aging. The Yemeni media
reported that one of the refineries operated by Safer
malfunctioned in mid-August, thus exacerbating the situation.
(Note: Post could not confirm this report. End note.)
Management shortfalls, logistical delays of imported diesel
consignments, and months of speculation that the ROYG was
preparing to lift subsidies also have contributed to the
diesel shortage, according to the World Bank.


5. (C) A final factor in the diesel crisis is corruption.
Yemen Consumer Protection Association Secretary General
Mahmoud Naqib complained to Econoff on August 20 that much of
the domestically produced diesel supplies are smuggled to
Saudi Arabia, Sudan, Somalia and Djibouti, where producers
can get a higher price. Al-Affendi told Econoff that ROYG
figures for total diesel supplies are unreliable and not
transparent. For example, the actual need for diesel may be
5 million liters, but the ROYG announces that it needs 10
million. The additional 5 million liters is then sold to the
world market. Al-Abbasi mentioned that only 20 percent of
subsidies go to the poor.

MEASURES TAKEN TO RELIEVE IMPACT OF DIESEL SHORTAGE
-------------- --------------


6. (C) The ROYG may take a number of measures to buffer the
Yemeni consumer from the impact of diesel shortages and the
lifting of subsidies. Abdulrizq stated that the ROYG plans
to establish a strategic petroleum reserve stockpile and
MOPIC plans to increase the number of Yemenis covered under
the Social Welfare Fund (SWF) from 1,000,000 to 7,000,000.
(Note: Other observers, like think-tank director Mohammed
al-Affendi, are more skeptical and believe that SWF benefits
would be distributed for political reasons rather than
according to need. End note.) YPC's al-Safyeri noted that
the ROYG plans to build another unit at the Aden refinery
within six years to boost production. Alternative energy
sources may also be a solution. Many electricity generating
plants in Yemen which currently use diesel may switch to
natural gas. When the Yemen Liquefied Natural Gas (YLNG)
project comes on-line at the beginning of 2009 (reftel B),
public demand on limited diesel supplies may be much less.

"ALARMING" EXPENDITURES ON OIL SUBSIDIES . . .
-------------- -


7. (C) Yemen has been affected not only by the shortage of
diesel fuel, but also by record high oil prices in the global
marketplace. Yemen imports 60 percent of its diesel fuel,
and high oil prices have subsequently driven up the cost of
diesel. This is a drain on ROYG funds as the price of diesel
fuel in Yemen is subsidized by the government. The Deputy
Minister of Planning and International Cooperation (MOPIC),
Mutaher Al-Abbasi, told Econoff on August 26 that oil
subsidies accounted for 35 percent of the 2008 public budget.
He noted that the ROYG spent YR 600 billion on oil subsidies
in 2007 and that the bill for the first half of 2008 was
higher than the first half of 2007. He called the import
bill on diesel "alarming," and said it caused severe balance
of payments problems for the ROYG.

... LEAD TO LIFTING OF DIESEL SUBSIDIES
--------------


8. (U) In order to rein in spending, on August 9 the ROYG
decided to raise the price of diesel sold to cement and iron
factories from 35 Yemeni riyals per liter to the world price
of 252. World Bank economist Abdulrizq said that the ROYG is
pursuing a "step-by-step" approach over a span of
"two-to-three years" rather than lifting all of the diesel
subsidies at once to soften the impact on the poorest
segments of society. (Note: The ROYG simultaneously lifted
subsidies on diesel and gasoline in July 2005, sparking riots
that led to 50 deaths (reftel A). End note.) He noted that
the lifting of diesel subsidies for cement and iron factories
would cause prices in the construction sector to increase.
Many experts believe that as the cost of building houses goes
up as a result of higher cement prices, landowners will
charge higher rents for these houses. The lifting of the
subsidies has already affected the transportation sector:
bus fares in Aden doubled from YR 5 to YR 10 (the equivalent
of US three to five cents) per trip in the third week of
August.

COMMENT
--------------


9. (C) There are no signs that the diesel fuel shortage and
high oil prices will end anytime soon. Use of alternative
energy sources (like natural gas) which decrease local demand
for diesel may be an effective first step. Increasing the
capacity of local refineries, establishing a strategic
petroleum reserve, and increasing the social safety net will
take more time. Corruption will probably never be eliminated
from the petroleum industry. Post will continue to monitor
closely the impact of diesel shortages and the lifting of
subsidies on the Yemeni economy, including possible ripple
effects on overall price inflation. END COMMENT

BRYAN