Fuel Subsidy Policy and Popular Mobilization in Syria

On February 17, Syrian Minister of Oil Muhammad al-Lahham warned Parliament that the price of fuel would have to increase. This announcement came just one month after the government raised the official price of diesel by more than 50 percent to 125 Syrian pounds (70 cents) per liter, the largest single hike since the uprising of 2011 and an eightfold increase since May of that year. As economic conditions continue to deteriorate for Syrians in government-held territory, the regime risks popular backlash by abandoning its long-standing guarantee of cheap energy — one of the last traces of the old Baathist populist commitment to Syrians’ economic welfare.

The Syrian regime faces simultaneous fiscal and energy crises. Its foreign exchange reserves totaled $17.4 billion in mid-2011. These funds were rapidly depleted by military operations, rising imports that replaced vanishing domestic products and falling revenues. The reserves nevertheless allowed the regime to stay afloat as it halted investment activities, received contributions from loyalist businessmen and displaced much of the population it had once supported. In July 2013 government also received an emergency $3.6 billion in credit from Iran, but that amount has likely been spent. Both Iran and Russia may be reluctant to provide additional aid given their decreased oil revenues.

Government-held areas also face severe fuel shortages, as Iranian oil deliveries have become less reliable and supplies from wells held by ISIS have dried up following coalition air strikes. The little oil that does arrive is refined in facilities operating at around 10 percent capacity, while demand for fuel has increased due to power outages that have forced Syrians to use diesel generators.

The Syrian government is the primary distributor of this fuel. It purchases crude oil, refines it and sells the resulting fuel domestically below market prices in what amounts to a de facto government subsidy of energy. But given the present fuel shortage, below-market official prices feed a black market that thrives at government expense. The regime hopes to bring this illicit trade under control by raising prices, eventually, to market levels.

Though this idea makes fiscal sense, it carries significant political risks. Sudden fuel price increases have previously helped to catalyze unrest by undermining what Raymond Hinnebusch calls the Asad regime’s “tacit social contract” with Syria’s population, in which “political acquiescence [is] bought through state delivery of a minimum level of economic opportunity and welfare.” To be sure, this “contract” frayed under President Bashar al-Asad’s liberalization campaign in the 2000s, and became increasingly irrelevant from 2011 onward, as the regime devolved into a patchwork of half-functioning state institutions and parasitic militias. Nonetheless, vestiges of the “contract” endure in the form of subsidized food and energy.

Syria began producing oil in quantity in the mid-1970s. Crude exports provided government revenue, and the state shared the wealth by selling petroleum products domestically below market prices. Besides benefiting consumers, this policy lowered the cost of agricultural and industrial inputs. Syrians’ standard of living improved substantially in the 1970s as the government invested oil wealth in industry and provided cheap energy.

The regime violated this portion of its “contract” in the early 1980s, and the consequences were severe. When crude exports dropped as Syria’s first oil wells struggled to keep up with rapidly growing consumption, the government raised fuel prices drastically. By 1982, the price of fuel oil — used mainly in industry — rose to more than 15 times the 1977 level. The government also quadrupled the price of kerosene and almost doubled the price of diesel between 1980 and 1982. These price increases exacerbated the strain on small manufacturers caused by a decade of state support for large-scale industry. They also increased hardship for farmers and consumers who depended upon cheap diesel, with consumers relying on kerosene as well. Nationwide, economic hardship gave additional momentum to a Muslim Brother-led insurgency. In Hama, home to small-scale industry and a hardline faction of the Brothers, price hikes intensified economic strain and helped catalyze a revolt that ended in that city’s destruction.

For the next three decades, the regime benefited from rebounding crude exports and attempted to correct for poor economic planning in the 1970s by liberalizing the economy. Liberalization ate away at the gains made by ordinary Syrians in the 1970s, but the regime remained committed to providing cheap energy. Fixed fuel prices lagged behind inflation as Hafiz avoided the rapid price hikes that contributed to the events of 1982.

When Bashar assumed control in 2000, rising domestic fuel consumption and diminishing crude reserves had begun to drain Syria’s oil revenues once again. Implicit fuel subsidies accounted for almost 11 percent of GDP in 2004, and rising global oil prices, declining Syrian crude exports, rampant fuel smuggling and growing fuel imports created strong incentives to raise prices. Upon the International Monetary Fund’s recommendation, Bashar did exactly that after declaring a liberalized “social market economy” in 2005. The price of fuel oil increased by a factor of seven between 2005 and 2008, and the price of diesel nearly tripled between 2007 and 2008.

It was a severe and sudden breach of the regime’s distributive commitments to consumers, agriculture and industry, all of which were suffering in the late 2000s. Domestic demand for manufactured goods had collapsed, and the Syrian textile industry went into a steep decline exacerbated by the rapid increase in fuel oil prices. According to Hinnebusch, higher fuel costs, together with government corruption and neglect, “combined with the terrible drought of 2007-2010 [and] led to agricultural decline.” High diesel prices compounded the effects of the drought, which had made farmers more dependent upon diesel-fueled irrigation pumps. For consumers, price increases worsened an already bad economic situation: Poverty grew by 10 percent in the late 2000s, and public-sector wages failed to keep pace with inflation.

In early 2011, the government announced its intention to bring fuel prices to market level by mid-decade. It raised the price of fuel oil by 50 percent that January, straining the country’s already ravaged industrial sector, and promised to bring all fuel prices to market level by 2015. Though this measure certainly did not cause the 2011 uprising, it coincided with deteriorating economic conditions in Syria and mass demonstrations across the Arab world. Recognizing its misstep, the government lowered diesel prices in May, but Syria’s uprising had already begun.

Syria’s government still aims to bring fuel prices to market levels, and may yet do so. But wartime shortages and high black market prices have made it more difficult. The government remains responsible for distributing fuel to most of the Syrian market, and sets national prices that do not reflect wide variations in supply and demand across its territory. Raising official prices will increase strain on those who buy on the formal market, fail to address local variations and encourage profiteers to raise their own prices. To prevent profiteering, Syria’s cabinet and provincial governments have issued warnings to merchants who sell above official rates, and the Ministry of Internal Trade and Consumer Protection has fined and closed fuel stations.

As Oil Minister Lahham warned, the government will likely continue raising prices. Meanwhile, Syrians living in government-held territory will continue to struggle with rapid inflation, high unemployment and shortages of basic goods. How the regime paces further price increases — and how the increasingly desperate population reacts — bears watching.