US embassy cable - 05BAGHDAD4466

C O N F I D E N T I A L SECTION 01 OF 02 BAGHDAD 004466 
 
SIPDIS 
 
E.O. 12958: DECL: 10/28/2015 
TAGS: ECON, ENRG, EPET, EFIN, PGOV, PREL, IZ, Petrolium, Energy Sector 
SUBJECT: IRAQI FUEL PRICES RISES -- FACT AND FICTION 
 
REF: A. BAGHDAD 4407 
     B. BAGHDAD 4335 
     C. BAGHDAD 3989 
     D. BAGHDAD 3988 
 
Classified By: Economic Minister Counselor Tom Delare for reasons 1.4 ( 
b) and (d). 
 
1.  (C) Summary: Attention by the IMF to fuel price increases 
as one of several criteria for the Standby Arrangement with 
the IMF suggests that an explanation of the real fuel price 
situation might be useful.  First, the Council of Ministers 
(CoM) decision of October 6 raising fuel prices effective 
December 31, 2005, largely sanctioned the unofficial price 
increases that had been underway since September.  This may 
impact the state budget, as the proceeds of the unofficial 
increases have thus far been largely reflected in the State 
Oil Distribution Company's balance sheets rather than 
government coffers.  Finally, another CoM decision allowing 
private sector involvement in the refining and importation of 
petroleum products is viewed as a positive step towards 
marketization, but it does not provide profit margins for 
operators.  End Summary. 
 
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Council of Ministers Acts 
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2.  (SBU) The Council of Ministers (CoM) decided October 6 to 
raise consumer fuel prices in Iraq.  According to the 
decision, effective December 31, 2005, prices will rise as 
follows (1500 ID=$1.00, as per MinFin and IMF common usage): 
 
                  Current Price        Dec 31, 2005 Price 
               ID/liter and $/gallon   ID/liter and $/gallon 
Regular Gas        20 ID/$.05             50 ID/$.13 
Premium Gas        50 ID/$.13            150 ID/$.38 
Kerosene            5 ID/$.01             10 ID/$.03 
Diesel             10 ID/$.03             30 ID/$.08 
LPG               250 ID/$.50            500 ID/$1.26 
 
(Note: LPG is most often sold in 12kg cylinders.  The current 
price per cylinder is $.63 and will increase to 
$1.27/cylinder December 31.  End Note). 
 
A second decision recommended a $340 million (500 billion 
dinar) subsidy for the poor and unemployed, effective 
November 30, 2005, and also recommended private sector 
involvement in the import and refining of petroleum products. 
 
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The Situation on the Ground 
--------------------------- 
 
3.  (C) When asked about the CoM decision to raise prices, 
the Director General of the State Oil Distribution Company, 
Zuhayr al-Shakir, laughingly told Econoff October 26 "I have 
already done all that," referring to "unofficial" price 
increases he implemented for regular gasoline (from $.05 to 
$.13 per gallon) in the majority of Iraqi cities (refs B and 
C).  (Note: The new price was noted in Dohuk province the 
week of October 24.  End Note).  There has been no adverse 
public reaction to the de facto price increases, Zuhayr said, 
but the ongoing fuel shortages are a source of concern. 
Despite this, Zuhayr said because the GOI is afraid to take 
or publicize official action to raise prices, they are 
waiting to implement their decision until two weeks after the 
election. 
 
4.  (C) Zuhayr said that, in view of the option of home 
delivery under the winter fuel program (ref C), "People are 
already used to these prices."  Furthermore, the prices for 
fuel purchases over the amount authorized for the winter fuel 
ration are higher even than those authorized by the CoM for 
December.  For example, kerosene that sells for just over a 
penny per gallon via the subsidized coupon system, already 
costs the equivalent of $.06/gallon if it is delivered, and 
$.26/gallon for purchases in excess of a family's allotment 
at MoO distribution sites.  Similarly, diesel that sells for 
approximately $.03/gallon at service stations is being sold 
at mobile stations for as high as $.26/gallon.  Zuhayr said 
that gasoline is selling for as much as $.51/gallon at 
stations within five kilometers of the Iraqi border in an 
effort to keep fuel in the country rather than being smuggled 
out for resale abroad.  Black market prices are even higher 
(ref B). 
 
5.  (SBU) Word of the price increases has hit the papers and 
local television in Iraq, but has generated little public 
reaction.  Given what people already are paying - when they 
can find the fuel they need - many Iraqis appear to have thus 
far greeted the news with a shrug. 
 
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CoM Sufficient: No TNA Action Required 
-------------------------------------- 
 
6.  (C) Transitional National Assembly member (and former 
Minister of Oil) Thamir Ghadban told Econoff October 28 that 
no TNA action was required to enact the October 6 CoM price 
increases.  Although the CoM could send the decision to the 
TNA for action in order to "cover itself" if it so desired, 
the fact that the CoM had sent both decisions directly to the 
ministries and other elements of the government in his 
opinion superseded the necessity of any subsequent 
legislative action. 
 
7.  (C) Regarding the draft law on the liberalization of fuel 
imports (ref D), Ghadban said that the Economic Committee of 
which he is a member had not received the draft.  He 
indicated that he would follow up and check on the draft 
law's status.  Based upon his reading of the CoM decisions of 
October 6, however, Ghadban said that the CoM decision would 
obviate the need for TNA action make the liberalization of 
imports effective.  (Note: Ghadban's understanding conflicts 
with current Iraqi law, which suggests that government action 
to liberalize the import monopoly must occur through the 
legislative process.  Post is studying this issue.  End 
Note).  If TNA action were required, Ghadban added, it would 
be unlikely to happen this year in any event.  Due to 
Ramadan, the backlog of legislation upon which the TNA must 
act is immense.  Furthermore, reported Ghadban, legislators 
would be only partially engaged at best, because many of them 
would be campaigning in the run-up to the December 15 
elections.  Despite Ghadban's opinion to the contrary as to 
the necessity, the IMF has requested that the TNA approve any 
CoM activity to liberalize imports (ref A). 
 
8.  (C) Ghadban said that, as Minister of Oil under the 
previous government, he had pushed hard, though 
unsuccessfully, for price increases and to remove the 
government from the business of importing gasoline and 
diesel.  Kerosene and LPG must remain under government 
control (albeit at modestly increased prices), Ghadban 
asserted, because the poor depend heavily upon these fuels 
for heating and cooking.  Ghadban's approach reflects the 
approach the GOI is taking in its current draft law. 
 
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Reality Check 
------------- 
 
9.  (C) Comment: The fuel prices recommended by the IMF (ref 
A) are effectively an acknowledgment of Iraqi reality on the 
ground; many Iraqis already pay prices that are much higher 
than the proposed increase.  The more important question is 
whether the GOI or the distributors (including the State Oil 
Distribution Company) receive the additional funds from the 
new prices.  Fuel produced and sold by the state-owned 
refineries to the distribution company can now be sold for 
higher prices and will provide added income for the State Oil 
Products Distribution Company, which is using the proceeds to 
keep its balance sheets in the black and to carry out 
necessary capital upgrades.  In theory, this entire amount 
could be remitted back to the government (estimates vary from 
$250 to $400 million).  Under current practice, however, this 
is unlikely to happen - the GOI receives a flat rate of just 
under $.03/gallon (11 ID/liter) rather than a percentage of 
the selling price, and share of the company's "profits."  The 
Distribution Company, which has been selling at a loss for 
years, is only beginning to see a modest positive return. 
 
10.  (C) Comment cont'd: It is unclear how many - if any - 
private and foreign firms will rush to import and distribute 
fuel once the draft law is finally effected.  Under the 
current regulations, the GOI limits station owners to profit 
margins of under half a penny per gallon; these firms would 
have to sell gasoline at a landed cost (the cost of the fuel 
plus its transport to Baghdad) of no less than $1.77/gallon 
(approximately 700 ID/liter) in order simply to break even. 
This regulation must be amended for the private sector to 
take advantage of any change in the law.  In our view, the 
changes in price levels and the liberalization of imports are 
both too modest to guarantee change in market operation. 
Satterfield