Gas prices, discontent rising in Iraq

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In what is seen as an unavoidable trade-off, Iraq's acting government is risking public anger by ramping up gasoline prices to boost revenues and reduce a gas-smuggling trade that is helping to fund the insurgency.

Heavily subsidized since the days of Saddam Hussein, the price of gas has risen from about 5 cents a gallon to 10 cents a gallon, and is expected to rise dramatically in the coming months, despite the threat of street protests and other signs of discontent.

Robert Silverman, director of the State Department's Office of Iraq Economic Affairs, told an audience at Rice University's James A.Baker III Institute for Public Policy on March 30 that he expected the price to reach 50 cents a gallon by the end of the year.

Several violent demonstrations greeted an announcement in December that prices would be boosted, and it is not clear how the further price increases will be received in a country where driving is popular and the average annual income is about $1,500.

But the gas subsidies have placed a huge burden on the Iraqi treasury, amounting to $8 billion a year in lost revenues, or 30 percent of the nation's gross domestic product. U.S. congressmen have also complained about U.S. taxpayer funds being used to purchase gas in neighboring countries for sale in Iraq at such low prices.

Mr. Silverman said higher gas prices also are needed to attract foreign investment into a struggling refinery industry. Despite having some of the world's largest crude-oil reserves, Iraq still imports some 200,000 barrels per day of refined products, at a cost of $200 million to $250 million per month, according to the Energy Information Administration, a branch of the U.S. Department of Energy.

Although Iraq's eight refineries sustained no damage during the 2003 war, a combination of lagging investment and skyrocketing security costs has kept them operating at only 50 percent to 75 percent of capacity. Outside investment will be even more important in the future, as the United States winds down its effort to rebuild Iraq's infrastructure.

Yet another reason for boosting gas prices, Mr. Silverman said, is to cut down on a booming smuggling trade, which is indirectly financing the Iraqi insurgency. More than 50 percent of Iraq's oil profit may be lost to such practices annually, according to Iraqi officials.

With gas prices so low, it has proved extremely lucrative to smuggle Iraqi gas to neighboring countries such as Jordan, Syria and Turkey, where domestic prices are much higher, according to a recent International Monetary Fund report.

Many of the smuggling routes pass through insurgent-controlled areas in western Anbar province and elsewhere, where the truckers are stopped at roadblocks and forced to pay "taxes" usually totaling about 10 percent of the shipment's value.

Army Gen. John Abizaid, the chief of U.S. Central Command with responsibility for military operations in the Middle East, testified on Iraq's fuel problems during a March 9 Senate hearing on military operations in Iraq and the war on terrorism.

"Part of the insecurity of the oil has to do with bad infrastructure that's in terrible state of disrepair," he said. "It has to do with economic conditions where it becomes advantageous to smuggle oil. It has to do with a lot of corruption and criminal activity and tribal activity, as well."

Responsibility for the smuggling is thought to reach into the upper levels of the oil ministry, with ministry officials reported to have arranged for their own trucks to pick up gasoline from refineries and drive it to the borders. Record-keeping at the refineries is notoriously poor.

Although Iraq has created a commission to deal with corruption and openness in government, there is still "significant corruption in the system at this point," Secretary of State Condoleezza Rice said during the same March 9 hearing.

Commission members are often reluctant to report illicit activities because of death threats against them and their families. Some have already been killed.