US embassy cable - 05TEGUCIGALPA1851

UNCLAS SECTION 01 OF 02 TEGUCIGALPA 001851 
 
SIPDIS 
 
STATE FOR WHA/CEN, WHA/EPSC, EB/ESC, CA/OCS, AND DRL/IL 
STATE PASS TO USAID, OPIC, EXIM, USTR 
COMMERCE FOR MSEIGELMAN 
TREASURY FOR DDOUGLAS 
ENERGY FOR IA 
DOL FOR ILAB 
 
E.O. 12958: N/A 
TAGS: EPET, ENRG, EINV, ELAB, ECON, PGOV, CASC, ASEC, HO 
SUBJECT:  Honduras:  Public Unrest Over Gasoline Price 
Spike; Partial Price Reduction Fails to Halt Strikes 
 
REF: A: Tegucigalpa 1837 
 
     B: Tegucigalpa 1842 
 
1. Summary:  Unusually effective strikes by taxi drivers hit 
major urban centers on September 6-7, following a 25 percent 
increase in gasoline prices in the wake of Hurricane 
Katrina.  Whether prompted by easing markets or political 
pressure, the GOH walked back nearly half of the increase on 
September 6.  The two leading presidential candidates and 
leading opposition figures have come out against the 
increase, while the GOH maintains the increases are 
necessary.  To ease the impact on Honduran workers, 
President Ricardo Maduro has proposed and private enterprise 
has resisted a one-time salary bonus to all workers.  End 
Summary 
 
2. Reacting to spot-market price spikes following Hurricane 
Katrina damage to key U.S. Gulf coast refineries, the GOH 
raised domestic gasoline prices September 6 by 17 lempira 
(25 percent) to 85 lempiras (approximately USD 4.50). 
Gasoline prices in Honduras are set by the GOH, based on a 
complex formula that adjusts periodically to market swings, 
while also guaranteeing profit margins to importers, 
transport companies, and distributors.  International 
Monetary Fund resident Representative Hunter Monroe told 
EconChief on September 7 that when the spot prices for 
gasoline began to fall again over the weekend, application 
of this formula led the GOH to reduce the price by 7 Lempira 
(about U.S. 40 cents).  While most observers assumed this 
price cut to be a reaction to public outcry against the 
sharp price hike, Monroe was confident the reduction was the 
result of technical adjustments rather than politics.  As of 
September 6 (prior to the reduction) Honduran gas prices 
were the highest in Central America. 
 
3. The GOH receives over 40% of its approximately 35,000  to 
40,000 barrels per day of petroleum products from the U.S., 
mainly from Gulf coast refineries.  In addition to knocking 
out eight major refineries on the coast, Hurricane Katrina 
took down two key fuel pipelines. While the pipelines are 
now back at full capacity, the outages caused product 
shortages at terminals along those pipelines.  The six main 
gasoline companies in Honduras (Esso, Shell, Texaco, Dippsa, 
Hondupetrol, Gas del Caribe) normally maintain a two-week 
reserve supply per Honduran law. 
 
4.  Even at spot prices, the prices for these gasoline 
reserves -- purchased over the last two weeks -- were much 
lower than current prices. On this basis, opposition and 
community leaders were quick to denounce the prompt price 
increases at the pumps, in the belief that these represent 
windfall profits for the "multinational companies." 
Catholic Church Cardinal Oscar Andrs Rodrguez called the 
increase "unethical", while both Liberal Party presidential 
candidate Manuel "Mel" Zelaya and National party 
presidential candidate Porfirio "Pepe" Lobo called for 
immediate reductions in gasoline prices.  In response, 
Minister of Industry and Commerce Irving Guerrero reiterated 
that the GOH must not sacrifice fiscal responsibility, 
calling the situation "too complex for the people" while 
emphasizing that the GOH was "not a political but a 
technical government" and that they will not be drawn in by 
"demagogy". (Comment: Post does not believe the gas stations 
s 
are making windfall profits, as the higher prices charged 
today are used as operating capital to purchase new (more 
expensive) gasoline supplies tomorrow, resulting in no net 
gain to the distributor beyond his normal profit.  End 
Comment.) 
 
5. In reaction to the price hikes, taxi and bus drivers went 
on strike throughout the country on Tuesday Sept 6, with 
hundreds of taxis in Tegucigalpa blocking intersections and 
the main highways in and out of the city.  The drivers are 
protesting higher fuel prices and calling for a reduction in 
pump prices and an increase in taxi fares.  The protest has 
been largely non-violent, though Post has received reports 
of isolated vandalism and rock throwing at cars attempting 
to navigate blocked roads throughout the day (ref A).  The 
strike continued through September 7, with the president of 
the Public Transit Association indicating the length of the 
strike "depends on how seriously the government wants to 
negotiate." A meeting is scheduled for the afternoon of 
September 7 at 4pm between Minister of Transportation and 
Public Works Jorge Carranza and the striking taxi drivers. 
(Comment:  Post anticipates this meeting will yield a taxi 
fare surcharge to offset higher fuel costs. End Comment.) 
 
6. Private industry took a strong position against the price 
increases, with the president of the National Industries 
Association Adolfo Facusse stating the latest reduction was 
too little too late, and did not mirror the recent reduction 
in world prices.  President Ricardo Maduro's recent 
initiative to force private industry to defray price 
increases for their workers by paying a one-time salary 
"bonus" (ref B) has also angered industry. Added to their 
own higher energy costs, industrialists fear the bonus 
payments would force layoffs or even business closings. 
Jesus Canahuati, the President of the Honduran Maquiladores 
Association, said that if industry is forced to pay the 
bonuses, "the cure would be more expensive then the 
sickness." 
 
7. Comment: Energy prices continue to provide grist for the 
electoral mill, as Honduras approaches its November 27 
presidential and Congressional elections.  Candidates of all 
stripes have proposed several unwise populist quick-fixes to 
the energy crisis, including cutting energy taxes, 
eliminating fuel surcharges, encouraging the state to 
nationalize and monopolize fuel purchases, reopening 
existing energy contracts with a view to reducing previously 
agreed pricing structures, and, most recently, requiring the 
private sector to pay salary bonuses to help workers face 
rising energy costs.  The GOH is also undertaking other, 
more measured policies, such as expanding targeted 
electricity subsidies for the poor, and transportation 
subsidies for the poor and for students.  Post and the IMF 
continue to watch events with interest, and will seek to 
ensure that GOH policies neither wreak havoc with carefully 
crafted fiscal disciplines nor prejudice foreign investors 
with signed and sealed contracts.  End Comment. 
 
Williard