VZCZCXRO2583
PP RUEHBC RUEHDE RUEHKUK
DE RUEHEG #4596/01 2080956
ZNR UUUUU ZZH
P 270956Z JUL 06
FM AMEMBASSY CAIRO
TO RUEHC/SECSTATE WASHDC PRIORITY 0160
INFO RUEHEE/ARAB LEAGUE COLLECTIVE
RHEBAAA/DEPT OF ENERGY WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHDC

UNCLAS SECTION 01 OF 02 CAIRO 004596 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
STATE FOR NEA/ELA 
 
E.O. 12958: N/A 
TAGS: ENRG ECON PGOV EG
SUBJECT: EGYPT INCREASES FUEL PRICES; PUBLIC REACTION MUTED 
 
REF: CAIRO 4518 
 
Sensitive but unclassified.  Please protect accordingly. 
 
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Summary 
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¶1. (SBU) Egypt made a small dent in its burdensome fuel 
subsidies on July 21 with price increases across a range of 
fuel products.  The increases will be welcomed by 
multinational fuel retailers who have been operating on 
non-existent margins.  Price gouging in the across the 
economy for derivative goods and services, if unchecked by 
the GOE, could inflame what has thus far been a tempered 
public reaction.  End Summary. 
 
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Fuel Price Increases 
-------------------- 
 
¶2. (SBU) Fulfilling Minister of Petroleum Sameh Fahmy's June 
19 prediction (reftel), the GOE announced on July 21 that, 
effective immediately, it was raising the price of 90 octane 
gasoline in addition to other fuel products to include 
diesel, fuel oil, kerosene, and natural gas supplied to 
industry.  While the percentage increases are significant, 
remaining subsidies still price Egyptian fuel products well 
below world market levels.  The following price increases 
became effective on July 21: 
 
-- 90 Octane Gasoline from LE 1.00 (USD 17 cents) to LE 1.30 
(USD 23 cents) per liter.  The last price increase for 90 
Octane gasoline was in June 1992. 
 
-- Diesel from LE .60 (USD 10 cents) to LE .75 (USD 13 cents) 
per liter. 
 
-- Fuel Oil ("Mazout") from LE 300 (USD 52) to LE 500 (USD 
87) per ton 
 
-- Kerosene from LE .40 (USD 7 cents) to LE .70 (USD 12 
cents) per liter 
 
-- Natural Gas supplied to factories (not regular commercial 
establishments) is expected to increase by up to 25 percent 
but the exact figure in not yet known. 
 
¶3. (SBU) Based on our estimates, the price increases will 
save the GOE LE 3.5 billion (USD 609 million).  The overall 
remaining subsidy amounts to at least LE 40 billion (USD 7 
billion).  According to World Bank estimates, Egypt's fuel 
subsidies in 2005/2006 were equivalent to 6.9 percent of GDP, 
up from 2.8 percent in 2000/2001. 
 
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Public Reaction 
--------------- 
 
¶4. (SBU) Aside from reported scuffles between cab drivers 
seeking to boost their fares and unenthusiastic passengers, 
we have not witnessed any violence in reaction to the price 
increases.  The timing of the announcement, on the Friday 
Muslim Sabbath when most families remain at home prior to 
heading to the mosque for mid-day prayers, and preceding 
Egypt's National Day holiday when many taxi and truck drivers 
would be off, likely tempered the initial public response to 
the increase.  While some press commentators remarked on the 
timing, the majority of public criticism leveled at the GOE 
asserts that the GOE had "lied" about not increasing prices. 
Although the announcement did not come until Friday July 21, 
word of the increase had leaked out by the evening of the 
20th and Embassy officers noted long lines of motorists at 
local gas stations seeking one last fill-up at the old price. 
 
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GOE Damage Control 
------------------ 
 
¶5. (SBU) Rumors and prognoses about the effect the fuel price 
increases will have on consumer goods are being circulated in 
the press, and have prompted senior GOE officials to seek to 
reassure the public.  Minister of Electricity Hassan Younes 
stated there will be no hike in electricity bills following 
the increase, while Minister of Interior Habib Al Adly, in an 
effort to stem potential price gouging, said the MoI will 
step up its supervision of the market and confront attempts 
to raise prices of related commodities and services.  Even 
 
CAIRO 00004596  002 OF 002 
 
 
prior to the increase, Minister of Finance Yousef Boutros 
Ghali sought to show how the rich benefited more than the 
poor from the gasoline subsidy.  He said the subsidy 
benefited the rich to the tune of LE 1,700 (USD 296) per 
capita while the poor only gained LE 300 (USD 52) per capita, 
one explanation being that poorer Egyptians in general either 
didn't own cars, or own old and dilapidated cars that run on 
80 octane gas. 
 
¶6. (SBU) With the fuel prices coming on the heels of 
increases in the Metro (commuter train) ticket prices (single 
ticket fares rose from LE.75 to LE 1) and some road tolls, 
the GOE is also looking to counteract fears of other price 
increases on staple goods.  The Ministry of Social Welfare 
announced that it was increasing the bread subsidy from LE 8 
billion (USD 1.39 billion) to LE 9 billion (USD 1.57 billion) 
to offset any possible flow-through increases due to the rise 
in the cost of diesel. 
 
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Benefits to Petroleum Industry 
------------------------------ 
 
¶7. (SBU) As reported in reftel, fuel retailers, who have been 
operating with slim margins and not benefiting from world 
market pricing, have been pushing the GOE to increase prices 
for some time.  Despite prices remaining well below market 
levels, the increase in 90 Octane Gasoline to the price they 
had predicted certainly provides space for a margin increase 
thereby improving their profitability outlook.  The increase 
in the price of natural gas sold to industry may also benefit 
Egypt's growing natural gas sector by providing greater 
incentive for multinationals to invest in production and 
exploration.  Stuart Fysh, Executive VP of British Gas, was 
recently quoted in the press as saying that Egypt's gas 
subsidies remove about two-thirds of the economic return, 
markedly reducing the attraction of investing risk capital in 
exploration in Egypt. 
 
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Environmental Impact 
-------------------- 
 
¶8. (SBU) Aside from helping retailers' margins and decreasing 
the subsidy burden on the GOE, the price increases could 
provide some environmental benefit.  Particularly in Egypt's 
rural areas, the deflated price of kerosene coupled with the 
2004 increase in the diesel price led to a practice whereby 
some retailers were cutting diesel with the cheaper kerosene 
and then selling the mix as diesel at the higher price. 
Decreased efficiency and higher emissions resulted.  Also, 
the pricing of 90 octane just below 92 octane could prompt a 
switch to the better performing fuel, in addition to 
modulating demand for gasoline overall.  The increase in 
diesel prices over the last two years have also prompted 
switches to cleaner or more efficient power sources.  Prior 
to the 2004 increase, for example, the diesel price was so 
low that some hotels preferred to run off of diesel 
generators rather than link into the electricity grid. 
 
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Comment 
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¶9. (SBU) Although the price increases make only a small dent 
in Egypt's overall subsidy burden, they are a positive step 
and indicate a commitment on the GOE's part to address the 
issue.  While being hit with some criticism, the GOE seems to 
have weathered the announcement well.  If price gouging 
becomes widespread and is not checked by authorities, 
however, the public reaction could grow much stronger. 
RICCIARDONE