Tuesday, August 29, 2006

Pipe dreams

In the aftermath of sending a new ambassador to Iraq, a deal seems to have been struck with the Iraqi government for discount oil. According to the reports on the issue, the Iraqis have agreed to supply Jordan with 30,000 barrels of oil per day, out of a total of 100,000 barrels which are our total need. Some reports suggest that the total figure might rise later to 60,000 barrels per day. The “preferential rates” that the oil will be supplied at have not been disclosed, presumably to keep economic observers, bloggers and other annoying people from calculating how much the government will make off the deal.

Initially, the oil will be shipped by tankers to Jordan, with a plan to lay a pipeline later. It seems that the pipeline will end in Aqaba, with a spigot in Zerqa to feed the oil refinery there. Questions about the viability of the deal have been raised, given the security situation in Iraq, particularly in the areas near the Jordanian border.

The treatment of the issue of oil grants and subsidies in Jordan is not straight forward. A couple of weeks ago, the government sent legislation to the parliament that included imposing the sales tax on fuel. The argument for this was to make up for the loss which will occur when the prices are floated; despite the fact that the government until now claims that it is subsidizing fuel. Yesterday, Khaled Zubaidi at Al Dustour wrote a critique of this situation, which raises a number of important issues. First, the government is implying that it is paying for oil at the highest Brent benchmark level ($78), despite the fact that they are paying Aramco between $65 and $67 to deliver it to the refinery. Second, Saudi Arabia is paying the Jordanian government $280 million to support Jordan. The grant expired last April, and the government is not telling whether it has been renewed. Third, Zubaidi calls for the lifting of government controls on the fuel market, as the cost in Jordan is higher than in many other world markets, despite the government subsidies. This is partially true (especially the cost of gasoline), but some oil derivatives are sold at lower rates than in Europe and the US (for example diesel). But the major thrust of the argument is valid. Free the market and relieve the government of the subsidies that will need to be reimbursed through the sales tax.

Jordan has two major oil pipelines running through its territory. One is an old line extending from Iraq to Haifa. This line was abandoned when Israel was established in 1948. The second is the Trans Arabian pipeline (TapLine) from the oil fields of eastern Saudi Arabia to the port of Sidon. The pipeline runs through the Golan Hights and its use was restricted after the 1967 war to pumping oil to Jordan. This was discontinued in 1990 after the Gulf war.

So, with such a history, one might be skeptical that the pipeline project will succeed, given how regional political and military events in the past have led to the demise of earlier projects. One thing that we can count on is not exactly knowing what is going on. Ah, predictability!



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