Gas subsidies drain Iraqi economy

By ANDREA R. MIHAILESCU, UPI Chief Energy Correspondent

WASHINGTON, Oct. 10 (UPI) -- The pernicious problem of cheap gasoline subsidies increasingly draining significant revenue from the Iraqi economy can be dealt with only in one way: time.

Iraq's former Oil Minister Thamer al-Ghadban said the negative impact of fuel subsidies on the economy can only be addressed in a gradual way, over two years at least.


Revenue losses in the government budget could be as much as $8 billion, or 30 percent of GDP, in 2004, according to figures from the International Monetary Fund and U.S. Energy Information Administration.

In May 2005, Ibraihim Bahr al-Uloum, who replaced Ghadban, said his primary goals were to reduce corruption in the oil sector, to improve fuel availability, to reduce attacks on oil infrastructure. Ghadban had cited 642 such attacks in 2004 at a cost of $10 billion, and to re-establish an Iraqi National Oil Co, the U.S. Energy Information Administration said in its Iraq country brief report.


The former Iraqi oil chief, a member of the National Assembly, says Iraqis need to approve the new constitution (which he was involved in drafting), despite its acknowledged defects, in the October 15th referendum.

After the constitution is approved, only then will Iraq be able to elect a government with a sufficiently long mandate to take strategic policy decisions and implement them.

Ghadban said the primary issue for achieving a stable economy will be to reduce the burden of subsidies. He suggested supplying cash compensation as prices are shifted to market levels, and allowing the private sector to import petroleum products.

The International Monetary Fund highlighted the subsidies problem in a report published on the state of the economy, the first such assessment since the departure of the Saddam Hussein regime.

In its latest effort, the government of Iraq ordered drivers to leave their cars at home on alternating days, based on odd or even numbered license plates. But the rule was hard to enforce since drivers used two sets of plates, switching them daily to avoid the $20 fine, or 30,000 Iraqi dinars.

Prices at the pump in Iraq are some five cents per U.S. gallon, or less than two cents per liter, one of the lowest prices in the world as local refineries struggle to meet demand.


Neighboring oil states face higher prices, with a significant price differential in neighboring Turkey. Iraq invested $3.2 billion in 2004 on importing petroleum products, mostly gasoline, the IMF reported.

"Subsidies also encourage illegal smuggling of oil out of Iraq, and exacerbate shortages within the country," the EIA said.

Rampant smuggling magnified the cost of purchasing imports from neighbors. Black-market fuel dealers, offering a faster alternative to long lines at the pumps, are also contributing to the problem.

Iraqis meanwhile will remain reluctant to relinquish cheap fuel, which many see as a given right based on national oil wealth. The new Iraqi government will have a tough time meeting the expectations of cheap as the former regime of Saddam Hussein produced sufficient supplies of gasoline to meet local demand, even during the 13-year period of U.N.-imposed sanctions.

As fuel Iraqi demand grows, refineries have been strapped by pipeline stoppages and electricity cuts. Cars from Jordan and other neighboring countries cross the border to purchase cheap Iraqi fuel. An estimated 1 million more vehicles travel Iraqi roads.

Iraqi refineries currently operate at only 50 percent to 75 percent capacity; Iraq imports approximately 200,000 barrels per day of refined products, at a cost of $200 million to $250 million per month, the EIA said.


Gasoline supplies are also strained with electricity grid off about half the time coupled with an increasing dependence on air conditioners.

"In order to reduce Iraq's need for oil product imports, significant investment will be needed to perform refinery upgrades (Iraq had identified dozens of such projects prior to the war) and possibly to build new refineries," the EIA said.

Iraqi politicians looking ahead to the new round of parliamentary elections before the end of the year will be reluctant to touch the issue of gas prices.

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