The present fighting, dying, and general chaos in Iraq has been severe enough to send official Washington into something of a panic. It could prove, however, to be but a modest introduction to the potential disaster in store if the neoconservative economic planners of the Coalition Provisional Authority (CPA) act, as they have indicated they might, to cut Iraqi oil and cooking gas subsidies after the installation of a government of “limited sovereignty” on July 1. The issue has not even been raised in the American media, and yet planning for it in Baghdad and Washington has, evidently, proceeded apace as part of the “privatization” of Iraq‘s economy. For anyone with some knowledge of the present Iraqi situation, this might seem, on the face of it, an act of inconceivable folly, but given the CPA’s track record on economic and other issues so far, it must be taken as a serious possibility.
For the last 13 or so years, Iraqis have had their gasoline for free, or almost free, which may come to a surprise to Americans who are now paying record-high prices to fill up their tanks. In Baghdad, the cost of a gallon of gas averages just eight cents, approximately 28 times less than the average cost in my hometown of San Francisco. The absurdly huge price difference prompted Congressman Doug Ose (R-Sacramento) to jokingly suggest Californians skip visiting their local filling stations and get their gas shipped directly from Iraq.
Unfortunately, the joke is on us. For the last year, American taxpayers have been footing the bill — as much as $1 billion and counting — to underwrite a subsidy system created by Iraqi dictator Saddam Hussein, who (despite what many in the administration still insist) did not spend every available dinar on secret weapons of mass destruction programs or on his ever-expanding system of opulent palaces and monuments. After the UN imposed comprehensive sanctions against Iraq in 1990, Hussein poured state funds into subsidies on basic goods to keep the Iraqi people from rising up against his oppressive and weakening regime. Coalition officials have for months stated that government subsidies must be “phased out as a matter of economic necessity.” But for Iraqis, who now view access to cheap fuel as a birthright, the subsidy is a small consolation for having lived under a brutal dictatorship and now a protracted occupation.
Many of the ethnic and religious tensions — among Kurds in the north, Shia Arabs in the South and Sunni Arabs in between — have traditionally revolved around the control of major oilfields. But there is one thing all Iraqis can agree on — the country’s oil belongs to Iraqis. Last August, when shortages drove up gas prices in Basra, the until-then peaceful Shia population took to the streets in a violent, deadly, weeklong protest against Coalition troops. Removing the subsidy for good would certainly incite far worse.
This has already led to disagreements between CPA planners and the Iraqis in its hand-picked Governing Council over when and how to remove the subsidy. Merek Belka, Poland‘s two-time finance minister and a big advocate of shock therapy in his own country, was appointed economic director of the CPA by Paul Bremer himself. In September, he said that subsidy elimination was “much more important than privatization” because “liberalizing” prices was the first step towards a free market. But that same month Iraqi Oil Minister Ibrahim al-Uloum told the Houston Chronicle that it was not proper to discuss raising oil prices when his workers at the ministry “don’t have clean drinking water.”
This tension will only intensify when the Americans nominally hand over power to Iraqis two months from now. The new Iraqi leadership, whether it is pro-American or not, will have enough sense to know that removing the costly subsidy would quite literally be political suicide and could indeed lead to a bloody revolt against any U.S.-appointed transitional government. At the same time, the new leaders might not have a choice. The nation already owes $120 billion in foreign debt and while oil production is now hovering near pre-war levels and is bringing in much needed revenue, it will take decades for Iraq to undo the devastation of three wars and 12 years of crippling economic sanctions.
The deciding factor in what could be a decidedly unbalanced subsidy debate is likely to be in Washington D.C. at the headquarters of the International Monetary Fund (IMF), which says it will provide $4.25 billion in loans once a representative government has been put in place on June 30, but only under the sort of onerous privatization conditions for which the IMF has now become famous or infamous depending on your point of view. Iraq, of course, desperately needs the money and the Governing Council thus far has done everything in its power to meet the preconditions for an IMF loan. The loan itself would depend in part on the ability of any new “government” to demonstrate to the IMF that its economic programs are strong and aimed at moving the country toward what’s termed “open market reform.” But a quick look at the IMF’s record in politically fragile countries shows its advice sometimes does more harm than good, especially when it comes to pushing for politically sensitive budget cuts such as subsidies.
In 2003, the IMF urged Haiti to eliminate its petroleum subsidies and to allow the price of gas to be determined by market forces. Because the IMF promised a $50 million loan as a reward, the small, coup-prone country obliged. The price of gasoline and cooking fuel promptly soared 130%, causing nationwide strikes and violent protests against the government of Bertrand Aristide in which a student was killed.
Similarly, riots threatened to interfere with President Bush’s trip to Nigeria last July after the oil-rich West African country dropped its gasoline subsidy in an attempt to woo the IMF back into a lending relationship with it. Indonesia? The same pattern occurred there in 1998: Fuel prices surged 71% after subsidies were cut at the behest of the IMF, triggering street riots, which left two dead.
There is no indication that the Fund would approach Iraq differently, even though it is already a war zone. In Iraq: Microeconomic Assessment, IMF experts wrote that “the reduction of domestic oil price subsidies would be highly desirable to eliminate their distortionary effect.”
There are certainly manifold problems with the present system. The country’s broken down refineries only produce about half of the supply of oil and cooking gas that Iraq needs. The lines at gasoline stations remain unusually long, something which Coalition officials attribute to the huge influx of cars into Iraq. Smuggling of siphoned off Iraqi oil to neighboring countries, where gasoline is ten times more expensive, is rife; while gas station owners often dilute the gas they sell with water in order to stretch supplies and raise profit levels on such an inexpensive commodity, which results in many sputtering engines on the streets of Baghdad.
The way in which, on taking over from Saddam, the CPA has supplied the fuel — and funded the subsidy — has been fraught with controversy. In December, the Pentagon cancelled a Halliburton contract to buy and ship gas products into Iraq from Kuwait because the company had allegedly overcharged the government by $67 million.
To this journalist’s untrained eye, the immense cost of the subsidy is either missing from or hidden in Iraq‘s IMF-compliant budget for 2004, although the food and agricultural subsidies are clearly marked as government expenses.
That is a bad sign for two reasons. As an extra-budgetary expense, the subsidy tab will continue to be picked up by the Americans and, even without Halliburton, importing fuel to keep up with Iraqi demand is a huge cost — upwards of $90 million a month. In addition, if such costs are not even included in the budget, perhaps that is a signal that the subsidy is scheduled to be phased out earlier rather than later — and that the CPA will be capable of doing so by fiat even after a new “sovereign” government is installed in July.
When I was in Iraq last summer, I met a Baghdad restaurant owner named Riath Abdul Razak Hassen. Lines at gas stations then, as now, were as long as tempers were short. American soldiers guarding the stations had been fired at. Although gas was cheap it was in remarkably short supply. A colleague and I were talking with Hassen about Iraq’s vast reserves of oil and, upon finding out we were Americans, he promptly said, “Bilafia,” or “bon appetite,” since he believed that our country was about to help itself to his oil fields.
“May the oil give you good digestion,” he was essentially saying, as if he had tossed all 100 billion barrels that Iraq is supposed to have in reserves into a fine vinaigrette salad and served them to us. Of course he spoke ironically. He had just been telling us that he would have to shutter his restaurant because he couldn’t afford to run the fuel generator needed to bring electricity to the establishment. Iraqis consider it as a national right to have inexpensive gasoline and cooking gas. Take that away from them and the Iraqi occupation would most definitely become a war about oil.
Brandon Sprague, a freelance journalist and recent graduate of the Graduate School of Journalism at the University of California, spent part of last summer reporting for Salon.com and other places from Baghdad.
Copyright C2004 Brandon Sprague
[This article first appeared on Tomdispatch.com, a weblog of the Nation Institute, which offers a steady flow of alternate sources, news, and opinion from Tom Engelhardt, long time editor in publishing and author of The End of Victory Culture and The Last Days of Publishing.]
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