Iraqi Gasoline Shortages and Opportunity Cost
From
"http://www.economist.com/printedition/displayStory.cfm?Story_ID=3502385">The
Economist, , via
"http:
//www.marginalrevolution.com/marginalrevolution/2004/12/iraq_economic_p.html">
Marginal Revolution, we learn why there are gasoline shortages in oil-rich
countries.
THE queue of angry motorists stretches for miles. Baghdad’s petrol stations are
drier this month than they have been since just after the American-led invasion
of Iraq in 2003. Some drivers wait for as much as 24 hours, sleeping in their
vehicles. When told that there is no petrol, some have lost their tempers and
started shooting. How, asks a furious driver, can an oil-producing country run
out of fuel?
Ask an insurgent, and he will assure you that the American army steals the oil
for its tanks. Others might blame the lack of capacity at Iraqi oil refineries
or the fact that the insurgents keep blowing up the pipelines. But the most
important reason is that the government has fixed the price of petrol at
approximately zero–barely one American cent a litre.
ShortageOfficials and petrol-station owners with access to subsidised petrol
have a choice. They can do the proper, legal thing and give the stuff away. Or
they can let it leak onto the black market, where prices are between ten and 100
times higher. Or they can smuggle it out of the country where, global oil prices
being rather steep at the moment, it sells for a tidy sum. …
In ten minutes, a guerrilla can scrape back a few inches of dirt, uncover some
pipe, attach a bomb made from one of the country’s abundant abandoned artillery
shells, and thereby wreak havoc in Baghdad. Between August and October this
year, pipe-raiding by terrorists (and oil thieves) cost the country $7 billion
in lost revenues, says the petroleum ministry.
Subsidised petrol in Iraq is a hangover from the Saddam era, but two changes
have made the system unworkable. One is that more Iraqis now seem to have cars
than under Saddam. The other is that the country is more lawless….
Saddam’s regime used to pay tribes to protect the pipes on their land. American
and Iraqi officials have followed suit, but sometimes find that if they pay one
tribe, a rival blows up the line and then claims to be more deserving of the
protection money.
In an oil-rich country, people expect gasoline to be cheaper, even though
its value is just as high as in an oil-poor country. This is a good example of
the idea of opportunity cost. If Iraq could not export oil, gasoline would be
very cheap there. But it can, so gasoline should be priced at the world level.
The opportunity cost of burning up a gallon of gasoline in your car in Iraq is
that that gallon can’t be sold on the world market.