Oil politics and economics

Prime Minister Bakhit last week announced a freeze in rises in the prices of oil derivatives, after creating the groundwork for it. In the aftermath of this, finance minister Ziad Fariz resigned. Is it a case of good politics and bad policy? Or were the reasons offered by the government and its media tools not as sound as they originally seemed?

It is difficult to answer these questions because full data is not available. What is well known is that poor and middle class Jordanians are having trouble coping with already high fuel prices because their income levels are not going up at the same rate as the rises in prices (despite government assurances that inflation levels are much lower then peoples perception of them. Go figure). The official line is that the current price levels are set based on the assumption the world oil prices are 60 USD per barrel, rather than the current level of over 70 USD. The 10 dollar differential costs about 1 million dollars a day. So, how do preferential oil deals, like the recent one with Iraq figure into the equation?

The Iraq deal is for a discount of 18 dollars per barrel for 30,000 barrels per day (daily imports are 100,000 barrels). An anonymous government official tried to minimize the importance of the deal, citing a 13 dollar per barrel cost to transport the oil. Presumably it costs nothing to transport oil from other sources. It just drives itself over, unlike the lazy Iraqi oil.

The Iraqis seem to be confident that the security issues related to transporting the oil have been solved, and so as long as the security situation is good then there should be no problems in implementing the deal.

So, the Iraqi oil deal should be enough to cover most of the losses incurred due to the rise in world oil prices, especially after factoring in prices that were as low as $52 last spring. The were making money back then.

The government typically accounts for such deals as follows. The $18 price differential will be considered a grant, and the treasury will be charged for the oil at regular market rates. This accounting scheme account for how the government was losing money even when Saddam was giving them oil for free. Of course, this gives a misleading impression. Although economically speaking trying to build an economy on real prices prevents distortions and discourages waste.

Samih Maaitah says that the best was to deal with future surprises, after the liberation of the energy sector next year will be to pay people salaries sufficient to cover basic costs of living. How radical. I doubt it will happen. How else can we always be beholden to the government?