Global Policy Forum

Fuel Prices Have Quintupled in Two Weeks
as the Government Starts to Reduce Subsidies

By Louise Roug and Borzou Daragahi

Iraq's government has sharply raised the price of fuel and other petroleum products this month, sparking discontent and protests and worrying international observers who say the increases could hurt millions of poor Iraqis and throw the country into further turmoil. Since the Dec. 15 parliamentary election, fuel prices have increased fivefold, mostly because the outgoing government of Prime Minister Ibrahim Jafari has cut subsidies as part of a debt-forgiveness deal it signed with the International Monetary Fund.

The move has shocked Iraqis long accustomed to hefty subsidies of gasoline, kerosene, cooking gas and other fuels, and thousands have demonstrated in and around the capital to protest the price increases. The oil minister has threatened to quit.

"Iraqis had some hope that this election would be a new start," said Mustafa Hussam Haidary, 46, as he waited to fill up his pickup truck at a Baghdad gas station. "This hope was gone because the explosions and car bombs came back on the next day, the conflicts between the political blocs started again, and then suddenly all prices increased after the government made their move on the oil products." Iraqis had gone from "hopeful to sudden panic and sorrow again," he added. "I think Iraqis have lost trust in their government."

Iraqi and Western officials say the government spends about $5 billion a year on the fuel subsidies. But the Finance Ministry has estimated the total cost at $6.9 billion, or 28% of the country's projected GDP this year, because the low prices have encouraged a huge smuggling business, with gas bought in Iraq shipped out at a profit to Iran, Kuwait, the United Arab Emirates and other countries.

Over the summer, gas was selling for about 5 cents a gallon. Now it's about 65 cents, and at the end of the price increases, gasoline will cost about the same in Iraq as it does in other countries in the Persian Gulf, about $1 per gallon. The prices of kerosene, diesel and cooking gas have seen similar or steeper increases. Diesel costs about 38 cents per gallon.

Though that may seem cheap to Americans, wages in Iraq are far below those in the United States. Employees in government ministries, for example, earn about $130 a month on average, putting them among the top earners in Iraq. Millions of other Iraqis live in poverty, relying on food handouts from the government. About a fourth of all Iraqi households subsist on less than $1 a day.

Eliminating the subsidies should allow Iraq's government to boost spending on infrastructure, the IMF said. "Because of the government subsidies, Iraq had the lowest gas prices in the world," said Bill Murray, an IMF spokesman in the U.S. "The idea is to redirect subsidies for petroleum products — that were actually subsidizing the black market — to improving public services. That money should be invested in health and education."

"The IMF decision on Dec. 23 to approve a standby arrangement for Iraq will permit the continuation of a process of debt relief that should see the forgiveness of 80% of a total debt of about $120 billion," a Western official said on condition of anonymity. Despite its huge oil reserves, Iraq has long struggled with economic problems. Before the U.S.-led invasion of 2003, international sanctions and a state-run economy hampered economic growth.

Sanctions were lifted after the invasion, and the economy is opening up. But violence, political instability and upheaval have retarded growth. Unemployment is high; various estimates place it between 28% and 60%. The only construction cranes in the capital are those for building the new U.S. Embassy. As much as 95% of government revenue comes from oil exports. Officials barely collect taxes or customs.

Mohammed Rasheed Kabaan, 38, who owns a gas station in Baghdad, said reducing subsidies was necessary and would benefit the country in the long term. But the sudden and steep price increase had been a miscalculation, he said. "First of all, people just came out of elections a couple of days ago, obviously hoping for some improvements," he said. "So it was very wrong timing…. They should do it gradually, explaining to people its positive impact."

It was unclear Tuesday who in the government decided on the timing of the subsidy reductions. Observers fear the rapid price increases could further exacerbate tensions in the country. "It's crazy, socially and politically," said Robert Mabro, former chairman of the Oxford Institute of Energy Studies and an expert on oil. Other initiatives should take precedence, he said, such as improving security and the general climate for investment. "The subsidies may be big, but the situation in Iraq is such a mess," Mabro said. "If there is a price increase, if they remove some of the subsidies, it will cause a lot of hardship."

To mitigate the effects of the price hikes, the government is planning to increase financial support for those hardest hit, said an Oil Ministry spokesman. The government has also begun running advertisements pointing out that price increases are necessary to secure the country's future.

Even after the increases of December, Iraqi fuel prices still don't cover production costs, the Western official said. "Twenty dinars a liter is basically free," he said. "The only thing you're spending is your time waiting in line. The people who have automobiles presumably have more disposable income. Poor people are not necessarily using cars."

Iraqis will have to readjust to a life without such heavy subsidies for the economy to improve, the official said. But Iraq must also increase oil production, attract investment and restart its industry, which has proved difficult amid continuing violence. Rebels have consistently targeted oil pipelines and refineries. Since the start of the war, there have been at least 280 attacks on the oil infrastructure in Iraq, with at least 96 in the last year — almost two per week.

Because of poor security, chronic electricity shortages and crumbling infrastructure, foreigners as well as rich Iraqis have balked at investing in the country, opting to keep their money on the sidelines or place their bets on ventures in Jordan and the United Arab Emirates. U.S. and Western officials point out that construction in the more stable Kurdish-controlled north of Iraq has been booming. They say that trend could spread through Iraq if security improves.

Another problem, Western officials said, is that many countries that have promised aid and foreign investment to Iraq have yet to deliver, forcing the government to come up with other ways to balance its books. Iraq has also begun dismantling the legacy of the U.N. oil-for-food program, which allowed Saddam Hussein's regime to sell oil only to buy food and medicine; those items were then distributed to each family based on a ration system.

Iraqi families rich and poor still get monthly food baskets. Iraqi and U.S. officials would like to replace the program with an ordinary welfare system that provides benefits for those living in poverty. But it is the sudden rise in fuel prices that has caused the most consternation. Around the country in recent days, people have taken to the streets in protest.

This week, a send-off for those leaving the western city of Fallouja to go on the hajj, the pilgrimage to Mecca, turned into a protest of fuel prices as well as election results. On Dec. 18, demonstrators in the southern city of Amarah clashed with police after gathering in front of the provincial government building. Farther south in Basra, drivers blocked roads and burned tires near gas stations. The governor of Basra then decided to disregard the central government's edict on reducing subsidies, and police officers announced a return to previous prices through loudspeakers around town. It's unclear how the dispute will be resolved.

Oil Minister Ibrahim Bahr Uloum has said that if poor Iraqis do not receive government aid to help pay for fuel, he will quit. Selling Iraqis on the long-term benefit of the cut in subsidies may be tough. "I myself do not own a car, but this increase of prices will enhance inflation on all products," said Ayid Abed Razaq Salman, 43. "I think the government should take immediate steps before these peaceful demonstrations turn violent."

Times staff writers Caesar Ahmed, Asmaa Waguih and Saif Rasheed in Baghdad and Maggie Farley in New York and special correspondents in Najaf, Iraq, and Basra contributed to this report.