US embassy cable - 05AMMAN5228

UNCLAS SECTION 01 OF 02 AMMAN 005228 
 
SIPDIS 
 
SENSITIVE 
 
STATE FOR NEA/ELA 
STATE ALSO FOR EB/ENR 
 
E.O. 12958: N/A 
TAGS: ENRG, EPET, EFIN, ECON, JO 
SUBJECT: FUEL PRICE INCREASES IN JORDAN ON THE HORIZON 
 
SENSITIVE BUT UNCLASSIFIED.  FOR USG USE ONLY. 
 
1.  (U)  SUMMARY:  Royal Court Minister Marwan Muasher June 
27 spoke briefly about lifting oil subsidies in remarks 
carried prominently in most of the Arabic-language dailies. 
It is only a matter of time before the first wave of oil and 
gas price hikes are announced and implemented.  Muasher's 
remarks appear to be paving the way.  As the Government of 
Jordan (GOJ) considers when to initiate the removal of 
subsidies on oil products, we review below the current GOJ 
price structure and proposed pricing methodology, and detail 
where the targets for subsidy removal (and price increases) 
are, and some of the likely effects.  Refined diesel gas for 
vehicles and heating -- most produced at the Jordan Petroleum 
Refinery -- accounts for the largest share of subsidies. 
Increases in diesel prices will immediately affect commercial 
transportation.  In resource-poor Jordan, where most goods 
including consumables are transported by truck, the price 
rise will contribute to inflation in the near-term. 
Residential heating, electricity generation and industries 
will also be hit, but the effects may not appear for some 
time.  The significance of the impact will depend heavily on 
the percentage of hikes chosen across a range of products. 
END SUMMARY. 
 
2. (SBU)  Muasher was reviewing the wider national agenda 
when he commented on the GOJ budget strains and the need to 
address what one daily headlined as the "end of the oil 
subsidy era."  He said that the budget deficit due to oil 
subsidies could prove "disastrous" and that the international 
rise in crude oil prices had to be dealt with by the GOJ.  A 
separate article in daily Al Rai carried the government 
Spokesperson's  statement that the cabinet had discussed the 
possibility of raising the price of fuel in Jordan.  The same 
article cited unnamed informed sources stating that the 
cabinet had established a committee headed by the Minister of 
Energy to discuss alternatives to oil subsidies under 
different scenarios.  (COMMENT:  It appears that these 
remarks were intended to lay the groundwork for an official 
announcement regarding oil product price hikes sometime in 
the near future, most likely after the new government is 
sworn in and members of parliament give their public backing 
to it.  In fact, the cabinet has already decided to eliminate 
the subsidies over a three-year period, starting with a 25 
percent cut next month.  END COMMENT.) 
 
Diesel a Potential Big Target 
----------------------------- 
 
3.  (SBU)   According to the Ministry of Energy (MOE), 
subsidies applied to diesel account for $350 million of the 
$550 million now allotted to oil subsidies under the revised 
budget (this and all other figures in this message are based 
on a crude oil price of $45 per barrel, "the current market 
price").  Diesel is currently priced at 0.135 Jordanian 
Dinars (JD) per liter, whereas the MOE calculates the price 
would be 0.300 JD/liter at the current market price with no 
subsidy.  (The exchange rate has been stable at $1.41/1 JD.) 
Last year, Jordanians consumed 1.75 million tons of diesel, 
the largest share among eight major oil product categories. 
The first of three diesel price hikes over the next 18 months 
is likely to appear to be a "high percentage" according to an 
MOE source, but only because the 0.135 JD base is so low 
compared to the target 0.300 JD.  (NOTE:  If the price rose 
about 32 percent in each of three increases, it would reach 
the new 0.300 JD benchmark.  A first price hike in the 20-32 
percent range would be mathematically feasible, while still 
allowing for balanced, nearly equivalent subsequent 
increases, and spreading out the effects.  END NOTE.) 
 
4.  (SBU)  Fuel oil used by industries and to generate 
electricity represents the second largest share of 
consumption in Jordan, at 1.43 million tons in 2004.  MOE 
analysts say that fuel oil should not undergo as large an 
increase, compared to diesel, because it has not been as 
heavily subsidized. 
 
5.  (SBU)  If diesel prices are raised, the added costs to 
Jordan's extensive commercial transportation industry 
(Transportation and Communications represent 19 percent of 
GDP) would be felt by the average citizen.  Jordan has few 
natural resources and imports a wide range of consumables and 
raw inputs for manufacturing.  Transporting some $8.1 billion 
in imports (73 percent of GDP) to population and 
manufacturing centers in the north from distant Aqaba in the 
south will contribute to a rise in domestic prices as costs 
are passed to consumers in the near term.  When consumers 
purchase heating oil later this year, they will again 
directly see the impact of the fuel increases on their lives. 
 
6.  (SBU)  Similarly, the cost of generating electricity and 
industrial production would go up.  Those plants fired by 
fuel oil may not see such a dramatic impact as those running 
on diesel (see para 4).  However, how and when those costs 
are passed to the consumer would vary more widely than the 
transportation-based and heating oil increases. 
 
Aviation Fuel A Pass-Through? 
----------------------------- 
 
7.  (SBU)  Jet fuel has a two tiered price scheme in Jordan. 
Local companies (read Royal Jordanian) are now charged 0.190 
JD per liter while all others are charged 0.290 JD/liter. 
MOE sources say that these would be brought up to the current 
market price (and to parity) in just two steps.   The 
percentage increase in "local company" jet fuel prices would 
obviously be higher.  Tour agency operators in Jordan 
familiar with the pending adjustment have been warning 
customers that already-purchased RJ tickets may see a 
fuel-price-increase fee slapped on when the jet fuel price 
hikes are implemented. (Post is faxing to NEA/ELA and EB/ENR 
the current GOJ petroleum price list.) 
 
Pricing Basis May be Stabilizing 
-------------------------------- 
 
8.  (SBU)  Also under review by the GOJ is the basis for oil 
product pricing.  The pricing methodology being favored, 
according to informed MOE sources, is the "import parity" 
basis.  That is, the oil product pricing would be based on 
the world crude oil prices (as given for an Aqaba port 
delivery) plus tariffs, handling costs, and transport to the 
point of sale.  For example, if the price of diesel at the 
pump near the Zarqa JO Petrol oil refinery is the baseline, 
then the price of refined diesel transported to southern 
Ma'an would be higher.  This policy would remove another 
hidden cost of fixing the price of fuels nationwide. 
 
9.  (SBU)  COMMENT:  We understand that GOJ policy makers are 
reviewing extensive impact reports based on a wide range of 
fuel price increase scenarios.  While the "mix" of increases 
across eight fuel categories that the GOJ finally chooses may 
give some leeway in determining how and when the public feels 
the effects, Minister Muasher's comment remains central to 
the policy question:  the Jordanian public must be prepared 
to deal with the new subsidy-free era.  The GOJ is now 
embarking on its effort to inform the public and shape the 
reaction while maintaining fiscal integrity.  With world 
crude prices hitting record levels, members of the Jordanian 
public will have to learn to accept the simple economic facts 
of life -- they must pay for their oil as they consume it. 
It remains to be seen how ready they are and how much they 
can accept. 
HALE