VZCZCXYZ0008
PP RUEHWEB

DE RUEHYN #1461/01 2461040
ZNY CCCCC ZZH
P 021040Z SEP 08
FM AMEMBASSY SANAA
TO RUEHC/SECSTATE WASHDC PRIORITY 0237
INFO RUEHDJ/AMEMBASSY DJIBOUTI PRIORITY 0575
RUEHNR/AMEMBASSY NAIROBI PRIORITY 0420
RUEHRH/AMEMBASSY RIYADH PRIORITY 1552
RHEBAAA/DEPT OF ENERGY WASHINGTON DC PRIORITY
RUCPDOC/USDOC WASHDC PRIORITY

C O N F I D E N T I A L SANAA 001461 
 
SIPDIS 
 
EEB/ESC/IEC/EPC FOR MATTHEW MCMANUS 
AMEMBASSY NAIROBI FOR SOMALIA AFFAIRS UNIT 
DEPARTMENT FOR NEA/ARP FOR AMACDONALD 
 
E.O. 12958: DECL: 08/27/2018 
TAGS: EAID ECON ENRG EPET PGOV DJ SA SO SU YM
SUBJECT: DIESEL PROBLEM MORE CRISIS OF SUPPLY THAN PRICE 
 
REF: A. 05 SANAA 1976 
     ¶B. 07 SANAA 1210 
 
Classified By: CDA Angie Bryan for reasons 1.4 (b) and (d) 
 
¶1.  (C)  SUMMARY:  Persistent diesel shortages attributed to 
high demand, low refinery capacity and corruption have 
plagued Yemen since May 2008.  As a result, the ROYG has 
decided to take a number of measures to increase diesel 
supply. The high international price of oil has forced the 
ROYG to pursue a step-by-step lifting of oil subsidies over a 
period of three years, beginning with diesel fuel subsidies 
for cement and iron factories on August 9.  In spite of these 
efforts, it is unlikely that the diesel shortage and related 
high prices will end anytime soon.  END SUMMARY 
 
¶2.  (U)  Yemen has experienced widespread diesel fuel 
shortages since May 2008, with owners of agricultural 
machinery, trucks and bakeries suffering the most.  There are 
long lines at most gas stations, and diesel supplies usually 
last only two-to-three hours each day.  World Bank senior 
economist Ali Abdulrizq told Econoff on August 23 that that 
the problem is more acute in the southern port city of Aden. 
According to media reports, the diesel fuel shortage became 
so severe in Aden on August 19 that it prompted Aden Governor 
Adnan Omar al-Jafari to pay a visit to the Yemen Petroleum 
Company (YPC), which in turn pumped an additional 600,000 
liters of diesel fuel into gas stations.  Problems have also 
occurred in Dhale and Ibb.  Local contacts on the ground in 
Ibb informed Econoff on August 25 of a major gasoline and 
diesel shortage and noted that most gas stations had no fuel 
to sell. (Note:  Local supplies of diesel and gasoline 
traditionally run out in Ibb right before Ramadan as it is a 
popular tourist destination during that period.  Ramadan 
began on September 1.  End note.) 
 
SUPPLY OF DIESEL AFFECTED BY HIGH DEMAND, LIMITED CAPACITY 
AND CORRUPTION 
--------------------------------------------- ------------- 
 
¶3.  (C)  One of the main causes of the shortage is the 
failure of supply to keep up with demand. In an August 24 
meeting with Econoff, the Advisor to YPC's Director General 
of Foreign Affairs, Mohammed Alsefyari, explained that the 
supply of diesel in Yemen has remained flat at 243,000 tons 
between 2006-08, while demand has increased.  Alsefyari 
indicated that Yemen would need an additional 240,000 tons 
per year in order to fill the gap. 
 
¶4.  (C)  Limited domestic refining capacity is also a factor 
in the diesel shortage.  According to World Bank economist 
Ali Abdulrizq, the nation's two refineries in Aden and Mareb 
produce only 130,000 bpd and are aging.  The Yemeni media 
reported that one of the refineries operated by Safer 
malfunctioned in mid-August, thus exacerbating the situation. 
 (Note:  Post could not confirm this report.  End note.) 
Management shortfalls, logistical delays of imported diesel 
consignments, and months of speculation that the ROYG was 
preparing to lift subsidies also have contributed to the 
diesel shortage, according to the World Bank. 
 
¶5.  (C)  A final factor in the diesel crisis is corruption. 
Yemen Consumer Protection Association Secretary General 
Mahmoud Naqib complained to Econoff on August 20 that much of 
the domestically produced diesel supplies are smuggled to 
Saudi Arabia, Sudan, Somalia and Djibouti, where producers 
can get a higher price.  Al-Affendi told Econoff that ROYG 
figures for total diesel supplies are unreliable and not 
transparent.  For example, the actual need for diesel may be 
5 million liters, but the ROYG announces that it needs 10 
million.  The additional 5 million liters is then sold to the 
world market.  Al-Abbasi mentioned that only 20 percent of 
subsidies go to the poor. 
 
MEASURES TAKEN TO RELIEVE IMPACT OF DIESEL SHORTAGE 
--------------------------------------------- ------ 
 
¶6.  (C)  The ROYG may take a number of measures to buffer the 
Yemeni consumer from the impact of diesel shortages and the 
lifting of subsidies.  Abdulrizq stated that the ROYG plans 
to establish a strategic petroleum reserve stockpile and 
MOPIC plans to increase the number of Yemenis covered under 
the Social Welfare Fund (SWF) from 1,000,000 to 7,000,000. 
(Note:  Other observers, like think-tank director Mohammed 
al-Affendi, are more skeptical and believe that SWF benefits 
would be distributed for political reasons rather than 
according to need.  End note.)  YPC's al-Safyeri noted that 
the ROYG plans to build another unit at the Aden refinery 
within six years to boost production.  Alternative energy 
sources may also be a solution.  Many electricity generating 
plants in Yemen which currently use diesel may switch to 
natural gas.  When the Yemen Liquefied Natural Gas (YLNG) 
project comes on-line at the beginning of 2009 (reftel B), 
public demand on limited diesel supplies may be much less. 
 
"ALARMING" EXPENDITURES ON OIL SUBSIDIES . . . 
--------------------------------------------- - 
 
¶7.  (C) Yemen has been affected not only by the shortage of 
diesel fuel, but also by record high oil prices in the global 
marketplace.  Yemen imports 60 percent of its diesel fuel, 
and high oil prices have subsequently driven up the cost of 
diesel.  This is a drain on ROYG funds as the price of diesel 
fuel in Yemen is subsidized by the government.  The Deputy 
Minister of Planning and International Cooperation (MOPIC), 
Mutaher Al-Abbasi, told Econoff on August 26 that oil 
subsidies accounted for 35 percent of the 2008 public budget. 
 He noted that the ROYG spent YR 600 billion on oil subsidies 
in 2007 and that the bill for the first half of 2008 was 
higher than the first half of 2007.  He called the import 
bill on diesel "alarming," and said it caused severe balance 
of payments problems for the ROYG. 
 
... LEAD TO LIFTING OF DIESEL SUBSIDIES 
--------------------------------------- 
 
¶8.  (U)  In order to rein in spending, on August 9 the ROYG 
decided to raise the price of diesel sold to cement and iron 
factories from 35 Yemeni riyals per liter to the world price 
of 252.  World Bank economist Abdulrizq said that the ROYG is 
pursuing a "step-by-step" approach over a span of 
"two-to-three years" rather than lifting all of the diesel 
subsidies at once to soften the impact on the poorest 
segments of society.  (Note:  The ROYG simultaneously lifted 
subsidies on diesel and gasoline in July 2005, sparking riots 
that led to 50 deaths (reftel A).  End note.)  He noted that 
the lifting of diesel subsidies for cement and iron factories 
would cause prices in the construction sector to increase. 
Many experts believe that as the cost of building houses goes 
up as a result of higher cement prices, landowners will 
charge higher rents for these houses.  The lifting of the 
subsidies has already affected the transportation sector: 
bus fares in Aden doubled from YR 5 to YR 10 (the equivalent 
of US three to five cents) per trip in the third week of 
August. 
 
COMMENT 
------- 
 
¶9.  (C)  There are no signs that the diesel fuel shortage and 
high oil prices will end anytime soon.  Use of alternative 
energy sources (like natural gas) which decrease local demand 
for diesel may be an effective first step.  Increasing the 
capacity of local refineries, establishing a strategic 
petroleum reserve, and increasing the social safety net will 
take more time.  Corruption will probably never be eliminated 
from the petroleum industry.  Post will continue to monitor 
closely the impact of diesel shortages and the lifting of 
subsidies on the Yemeni economy, including possible ripple 
effects on overall price inflation.  END COMMENT 
 
BRYAN