Fuel products prices in Iraq are highly subsidized, with the price differential between Iraq and neighbouring countries providing great incentive for smugglers - Iraqis and non-Iraqis alike - to profit from this. The current situation of incomplete security over long and porous borders lends itself to this activity, depleting supplies much needed in Iraq and generating a further need to import fuels that have in turn to be paid for at international market prices.

Estimated prices in Iraq and in selected neighbouring countries are:

Although the black market price at which smugglers may have to acquire supplies may be up to twenty times that of the official price, there is still clearly a major incentive to smuggle fuels. This incentive will not be eliminated until prices rise to a more realistic level.

Having said that, the present difficult economic situation makes it very difficult to raise prices and there is a long-standing expectation in Iraq, as a major oil producing country with many years of subsidised fuels under the previous regime, that the population is entitled to these low prices. People are prepared to wait in queues of 30 to 40 cars long for fuel at ID20 (1.3 US cents) per litre rather buy it nearby at a private fuel station for ID50 (3 US cents) per litre.

Although the salaries of government employees have increased substantially since the cessation of hostilities, the income of other sectors of the population has not yet grown similarly, nor has the underlying economy improved. It will take quite some time for the economy to reach a stage of development where fuel prices can be raised to a level sufficient to curb smuggling.

The extent of smuggling is almost impossible to quantify but is thought to be substantial and is a major drain on the economy.

(c) Sabotage

Sabotage of pipelines and oil isolated oil installations continues, with attacks targeting key facilities such as control valves. This has had the effect of preventing, yet again, the resumption of exports through the Iraq-Turkey pipeline, and cutting crude oil supplies to Daura refinery in Baghdad. Recent pipeline attacks in the south have disrupted crude oil exports from that area.

4. Electrical Power

The lack of sufficient electrical power in Iraq, and  its distribution, continues to be a serious issue, affecting not only day to day life of the populace but also essential services that in turn affect the humanitarian situation.

Peak electrical power generation has been hovering around the 4700 Megawatt level during the past fortnight, having previously exceeded 5000 MW.  The Ministry of Electricity’s new target is 6000 MW by the end of 2004.

The fundamental problem continues to be the reliability, or lack thereof, of Iraq’s old power stations.  At any one time, it is common to have up to 17 generating units in unscheduled (or forced) outage. These could typically account for 500 MW of generating capacity, in addition to units brought down for planned maintenance.

Baghdad South Power Station illustrates this problem well.  This 1950's plant, with its obsolescent technology, continues to function, but often with only one or two of its six units. Elsewhere, it would have been closed down years ago.  However, because of the dire need for electricity and the difficulty in building new power stations, the Iraqi authorities have no option but to keep the plant going.  Units are started, work for a few days, and then break down again with boiler leaks caused by corroded pipes.  The pipes are patched up with poor quality welding, and then the units restarted – until they break down again. Even when working, the units operate at well below their rated output and pollute the surrounding area as indicated.

The Coalition Provisional Authority and Ministry had undertaken a massive programme to procure replacement parts for power stations, including new boiler tubes for Baghdad South.  In most cases, it falls to Ministry engineers to fit these parts. They do not always have the requisite skills to do so.  Moreover, the state of the power stations is such that practically everything needs fixing.

The long-term solution to this problem is to build new, modern power stations.  In the meantime, the existing plants need to be rehabilitated and maintained so that they continue to function as well as they can.  It should be understood, however, that, unless the old units are fully rehabilitated, their reliability and output will always be low.

Full rehabilitation of thermal units is very expensive, requiring many tens of millions of dollars, and a year or longer to complete.  Rehabilitation should restore a unit to original output and conditions.  USAID commenced the rehabilitation of two units of Baghdad’s Daura power station in September 2003 with the aim of completion by summer 2004.  The present completion targets are now the end of the year.

A particular problem of rehabilitations is that, until the units are totally disassembled, it is impossible to know how much work actually needs to be done. In general, within Iraq, the conditions of units were found to be worse than first thought.  The conclusion reached by experts assigned to the issue is that full rehabilitation of thermal units is not technically, operationally or economically advisable, but that maintenance of such units is necessary until new plant can be brought into operation.

A subsequent bulletin will include a discussion on the issues associated with building new power stations.