Syria Liberalises its Oil Sector as its State Weakens and Regime Cronies Profit

The increasing difficulties faced by the Syrian government to import and subsidize oil products is leading to a rapid liberalization of this sector and to the end of the state monopoly that dates back to the arrival to power of the Baath Party in the 1960s.

Three and a half years after the beginning of the uprising, the challenges faced by the government in the oil industry include: low budget revenues; the devaluation of the Syrian pound relative to the dollar, which increases the cost of imports and the differential between the buying and selling prices of subsidised oil products; Western sanctions on the transport of petroleum products to Syria; and the end of the Iranian credit line that funded most oil imports in the last year.

As a consequence, since the beginning of October, the government has taken several measures to liberalize the oil sector.

In early October, it allowed the private sector to import and distribute mazout and fuel on the condition that they were sold exclusively to industrialists. Until then, the import of these products was the monopoly of Mahrukat, a company affiliated to the Ministry of Petroleum. The decision was justified by the need to ensure a regular supply of oil products to the industrial sector in order to end production stoppages in many factories.

Then, later that month, the government raised the price of these two products to their levels in world markets, ending, in practice, subsidies for the industrial sector – subsidies for households and other business sectors remained.

With the increase of prices and the authorization granted to the private sector to import, the oil market for the industrial sector is now almost completely liberalized. “Almost” because some restrictions remain. Before importing, traders need to obtain licenses from the Central Bank of Syria, from Mahrukat and from the directorate of industry in the governorate where they are based. These licenses are a means of selecting traders that will be allowed to import and, therefore, to favour regime cronies.

Then, in late November, Al-Watan, a well-connected daily, said that the Government was encouraging private investors to import crude oil, to refine it in one of the country’s two refineries of Banias or Homs and to sell it back in the local market or for export. It is not yet clear how the prices would be set or if the oil could only be sold to industrialists. The government would be paid by these investors either in cash or through the supply of some of the refined products.

Given the cost and the logistics required for this type of operations, only investors close to the regime, who can receive guarantees from the government that they will not face bureaucratic and other obstacles might be interested.

Although the Government retains a very important role in the oil industry, its growing reliance on the private sector is a reflection of the weakening of the Syrian State. For decades, control over the energy sector was perceived as a guarantee of national independence, as a means to encourage the development of a powerful industrial sector, and, through subsidies, as part of a policy to ensure social justice.

All of this is now crumbling, bit by bit, as the State relies more and more on regime cronies to support it.

Note: This article appeared first in December 2014 in The Syrian Observer

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