Erbil Announces Fuel Rationing, Plans for Two Refineries

By Alexander Whitcomb and Raed Asad Ahmed – Rudaw – 8.7.2014 – ERBIL, Kurdistan Region – Hit hard by gasoline shortages caused by fighting at Iraq’s largest oil refinery at Baiji, the Kurdistan Region has announced it will build two new refineries of its own in a move towards energy independence.  The only hitch is it’s not happening anytime soon.

Ashti Hawrami, the minister of natural resources, was called to the Kurdistan Regional Government (KRG) Parliament on Monday to account for the fuel crisis. “We have plans to launch two refineries in Dohuk and Garmiyan, but it takes two to three years to do so,” he told lawmakers. Scheduled improvements to existing refineries will also increase capacity over the next two years. In the meantime, the KRG must ration fuel supplies and encourage private companies to import gasoline to substitute for Baiji. Eighty percent of domestically-produced gasoline will be distributed to citizens through a coupon system. The other 20 percent is allocated for government departments and Peshmerga military forces.  Traders will be allowed to import gas from abroad, but the government has pledged to cap prices and regulate fuel quality.

Jihadi-led Sunni insurgents that have captured mostly northern territories, and are in control of a third of Iraq, also have been fighting to capture the Baiji refinery in Salahaddin province.

Fighting at the complex has been ongoing for the past several weeks, with conflicting reports  about whether it is in government control or has been taken over by the militants, led by the Islamic State of Iraq and Syria (ISIS).Hawrami explained that the current crisis was intensified by the generous gasoline subsidies provided by the government. Because commercial prices are significantly higher in Turkey, traders were buying Kurdish gasoline and taking it to market across the border. He complained oil was being smuggled out of the region, only to be resold to the government at higher cost as “imported oil.”

According to his estimation, a third of Kurdistan’s fuel was being sold on the black market.

Fighting by ISIS militants cut off the Baiji supply at the same time that demand for oil products spiked. Military mobilization, territorial expansion and a massive influx of refugees all led to a rise in fuel consumption in the region.  Dramatically diminished supply and increased demand were amplified by panic and black market speculation, resulting in enormous queues at Kurdish pumps over the last weeks. Hawrami also indicated that artificially low prices caused undesirable market distortions, even before the crisis hit. “There are more than 50,000 vehicles in the Kurdistan Region that belong to oil companies, consulates and foreign missions that operate in Kurdistan and benefit from gas subsidies,” he said. According to him, driving had become too cheap even for the intended recipients of the subsidies, the Kurdish lower and middle classes. While they deserved a subsidy, most poor people “do not have private cars — they use public transportation or cabs instead.” He pointed to the fact that many families have two cars, the hallmark of a developed country, despite the fact that the Kurdistan Region still has a relatively low income per capita.  If the crisis effectively reduces state subsidies — people invariably become more reliant on privately traded gasoline — there are a few upsides, Hawrami reasoned.“Iran’s environment and economy improved greatly after they removed their gas subsidy regime,” Hawrami told the room of skeptical MPs. When Iran increased gas costs (once set at $0.10 a liter), “traffic decreased by 20 percent in Tehran. People began using more public transportation than cars.”