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December 21, 2004

Iraqi Gasoline Shortages and Opportunity Cost

From The Economist, , via 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.

Posted by erasmuse at December 21, 2004 10:24 AM

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