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Fuelling rumours and discontent

As expected, news about another spike in the price of gas oil disturbed the market, as Sherine Nasr found out

Egyptians are living very hard time these days; sky-rocketing prices, endless bread queues and jammed traffic were topped with a rumour two weeks ago that gas oil prices will suddenly go up. Gas oil consumers are mainly heavy transport trucks and transport buses of all sizes; an increase in gas oil prices means a rise in the transport cost of commodities as well as passengers.

Word readily spread and a knee jerk reaction to the rumour was witnessed across the country: increased demand by frantic consumers who want to stock up in excess, making the product scarce and confirming the rumour -- and in turn making consumers even more nervous. So much so, that staff at a downtown gas station revealed that the volume of fuel that was supposed to cover sales during an entire day was sold out in less than six hours.

"I have been to at least 35 fuel stations and could not get any gas oil," complained Abdallah Mohamed, a private school bus driver. Mohamed said that fellow drivers faced the same dilemma the week before. According to him, his school reacted quickly by promising an agent at a local gas station a LE50 royalty if he immediately informed them when gas oil was available. Thus, a black market was born in no time, even though this week gas oil is readily available at LE0.75 per litre.

For its part, the General Egyptian Petroleum Corporation ( EGPC ) was quick to refute any such reports. "Gas oil prices did not and will not increase in the near future," EGPC 's chief Abdel-Alim Taha told a number of local newspapers. Taha explained that the problem was caused by an unfounded rumour, and that the crunch for gas oil was only felt in Greater Cairo -- which alone consumes almost 7,000 tonnes daily. This represents 20 per cent of the gas oil allocated to other governorates.

But oil expert Salah Hafez believes that the "unfounded rumour" is a test balloon by the government to examine reactions. "The rumour theory does not seem very convincing to me," Hafez told Al-Ahram Weekly. "The government was probing the market to see whether it can go ahead with a price increase or not. When some furious reactions were observed, it backed off."

Two months ago, fuel oil prices witnessed a 100 per cent increase overnight. Typically, the unannounced spike was carried out over a weekend and was not commented on.

For years now, subsidising petroleum products has given successive governments serious headache. An ever-growing increase in demand, partly because of development plans but mainly because there is no clear national energy efficiency strategy, is but one reason. Egypt's rapidly depleting oil resources and all time highs for oil price further aggravate the situation.

On Friday, oil prices rose above $106 a barrel before going down to $105 a barrel by Monday, when tensions between oil producers in Venezuela and Colombia eased over the weekend. During its 148th ordinary meeting in Vienna on 5 March, the Organisation of the Petroleum Exporting Countries (OPEC) decided to maintain production levels based on the fact that the current price environment does not reflect market fundamentals. OPEC is producing 32 million barrels a day, after increasing crude supply by 500,000 barrels a day last November to rein in ever spiralling crude prices.

On the national front, the government last week decided to allocate an extra LE19 billion in subsidies to petroleum products to contain the negative effects of rising international prices. According to Minister of Petroleum and Mineral Resources Sameh Fahmi, the subsidy for petroleum products jumped to LE48 billion in 2007 from LE42 billion in 2006. As crude oil prices are certain to surpass the $100 mark, heavier subsidies will be a must.

"Egypt has always been a net importer of gas oil," noted oil expert Hafez, who added that the import bill for this fuel has increased dramatically over the past decade due to depleting oil resources. He further explained that Egypt buys back Egyptian gas oil from the foreign partner at international prices. Altogether, Hafez believes that continuing to subsidise petroleum products is the surest way to disguise the real problem.

"Subsidy is a tranquiliser, not a remedy," he argued, adding that the government still has no way of identifying those citizens who deserve subsidies the most. "Instead of resorting to an action and reaction scenario on important issues such as subsidy," advised Hafez, "the government should adopt a long-term vision in which a gradual phasing out of subsidies is replaced by other tools which are more effective in a free market economy."

© Al Ahram Weekly 2008