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Is It a Trap? Playing Political Football with Fuel Subsidies in Kurdistan Region

17/05/2013 15:12 BST | Updated 16/07/2013 10:12 BST

High fuel prices and long gas station queues in Iraqi Kurdistan have led to calls for a government subsidy on fuel. But one industry analyst thinks that's a terrible idea. He explains why.

And it seems as though not a day goes by when oil in the semi-autonomous state of Iraqi Kurdistan doesn't make headlines, as huge discoveries of new oil fields are announced on a regular basis. And local drivers will often complain that, despite the apparent sea of oil under the ground in this region, they still have to queue for hours to fill their cars' tanks at petrol stations where government-sponsored petrol is sold.

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Recently those queues have been getting longer and fuel prices have been rising. And as they have, the call for authorities in Iraqi Kurdistan to start subsidising fuel has grown. Local media picked up on the issue and two weeks ago, a petition was launched that called on government to bring fuel prices down somehow. Although the petition did not ask directly for subsidies, it did demand that the government of Iraqi Kurdistan intervene in the free market to bring prices down.

In the past, fuel has been a big problem for Iraqi Kurdistan as there were no refineries in the region. Most fuel came from outside Iraqi Kurdistan at a high price. But in recent years refining capacity has increased.

Iraqi Kurdistan has the capacity to refine about 100,000 barrels of oil a day and this amount is set to rise in coming years. Interestingly, while most of what is known as the upstream sector in the oil industry - that is, oil exploration and extraction - is dominated by international companies, the downstream sector - that is, the refining industry - is dominated by local companies in Iraqi Kurdistan. Partly this is due to local government policies and partly it's due to lack of necessary foreign investment in this sector.

And although the quality of refined fuels is often not of the best standard, locals involved in this business have managed to keep up with local demand, using a combination of their own products and imported product. There are no accurate figures as to how much oil Iraqi Kurdistan is currently refining - but the region is close to self sufficient.

Iraqi Kurdistan also gets an allocation of fuel from Iraq and because this is partially subsidised by the government in Baghdad, this is usually sold using coupons. At private petrol stations locals can just drive in, pay and fill up as they please without queuing but at gas stations where fuel from Iraq is being sold, they must queue with their coupons.

Additionally because of all the disputes between Iraq's central government and the authorities in the semi-autonomous state of Iraqi Kurdistan on, amongst other topics, how the oil industry is managed, the central government has been playing politics with its fuel coupons. Shortages have become chronic and large queues are the norm at petrol stations subsidised by the coupon system. Higher petrol prices in recent months have also put more pressure on the coupon system as more drivers have been inclined to use it.

The result of all of the above: public dissatisfaction and calls for fuel subsidies.

In actual fact, in some ways the Iraqi Kurdish government already subsidise fuel, selling it at less-than-market-value prices in order to keep the upstream sector activity going and create an environment conducive to investment in the refining sector. The Iraqi Kurdish move to sell crude at a lower prices is an attempt to keep cash flow for oil production and exploration flowing and to counter the effect of halted exports via Iraqi pipelines (halted due to disagreements between the federal government and Iraqi Kurdistan. However the benefits of this are barely passed onto the average citizen, which frustrates many.

Still, whether by design or not, the Iraqi Kurdish government's long term policy on fuel subsidies has been the right one. And this should not change.

So far the Iraqi Kurdish government has resisted the temptation to change current policy because they understand that fuel subsidies would be a drain on their resources and wouldn't solve the main issues the region is facing anyway. The Iraqi Kurdish region is far from fully developed; it still has a way to go in building its infrastructure and services before it can think about the idea of subsidies.

The way the region operates now could make a good case for the subsidising of heating oil. But subsidising gas-guzzling luxury cars is hardly a good reason. Take a country like Venezuela for example. In 2011, it spent US$27 billion on fuel subsidies, around 9 percent of its GDP. The subsidies mostly benefitted the well-off as they were the biggest consumers of fuel, with bigger cars and more opportunities to travel. Meanwhile only around 3 percent of GDP was spent on health in Venezuela and a slightly higher percentage was spent on education. A fuel subsidy like this has an unequal impact and may not provide the best solution for those calling for subsidies anyway.

It is also worth considering that the money the Iraqi Kurdish would spend on fuel subsidies could doubtless be better spent on more essential sectors for development, like health and education. And the fact that many don't understand that every barrel of oil coming out of Iraqi Kurdish ground can be sold for around $100 USD; a barrel subsidised is lost revenue for the region.

Additionally large fuel subsidies are usually a bad political sign, an indication that the government is trying to buy its electorate's satisfaction because it cannot provide that through democratic institutions or responsible governance. This has certainly been the case elsewhere. The idea of cheap fuel still appeals to everyone and for obvious reasons. It is clearly also the kind of decision that will win votes. However once subsidies are in place, it is almost impossible to wean the public off them. Other countries - like Venezuela and Saudi Arabia - that have done this are struggling to control their subsidies and change the situation

It seems as though this debate on fuel subsidies in Iraqi Kurdistan will become louder and all sides need to make sure they deal with this sensitive issue responsibly.

So what to do? Instead of subsidies, the government could take a bigger role in facilitating large, downstream projects like refineries. Local institutions and local government could also take a better, bigger role in explaining to the public how, and where, their oil revenues go as well as making sure the public understands that universal subsidies are a drain on public finances. The government could do better in making sure that the people who most need fuel subsidised were able to access it. And the opposition must resist the temptation to play political football with this issue.

First published on Niqash