Carnival Of The Capitalists: Gas Pricing In Iraq

One other post that caught my attention is Kevin Brancato’s observations on gasoline price controls in Iraq:

I found out that not only is the price ceiling set really low, there is a state monopoly on retail gasoline stations.

Kevin’s lesson in basic economics is important: an artificially low price for a scarce good, and monopoly control over its supply chain, is a recipe for shortages. Furthermore, as Kevin says, the black market is not causing the shortages, but may indeed be helping to alleviate them by serving those willing to pay black market prices.

But what’s really interesting in Kevin’s story is the fact that the gasoline scarcity is not the binding problem (although price differentials have been causing some outflow of gas to Turkey, where the price is above the regulated price in Iraq + the transport costs and risk premium to get it there). The binding constraint is the infrastructure — the lack of pumps and gas stations. These stations are run by the Iraqi government. And as Kevin suggests,

[O]pen more pumps! Or better yet, permit competitors to open pumps, negotiate their own deals with foreign suppliers, and create their own supply chains.

Why might the Iraqi government not wish to do that? Are there some current and/or expected future rents that the government might earn from monopoly ownership and operation of gas stations? Are there corruption and side payment issues? I suspect there are, although it’s only a suspicion.

Yet another thing that should be privatized and open to entry in Iraq: gas stations!

While we’re on the subject of Iraqi petroleum, Vernon Smith’s WSJ commentary on the “Iraqi People’s Fund” came out while I was on my self-imposed (and, for once, enforced! with the help of my husband) hiatus, so I missed my chance to encourage you all to read it. In my stead, Alex Tabarrok at Marginal Revolution gave a great summary and set of excerpts to showcase the main argument, that

This action would launch the new Iraqi state as one based on individual human rights, and the rule of law, and anoint it with rock-hard credibility by giving every citizen a stake in that new regime of political and economic freedom. The objective is to undermine any citizen sense of disenfranchisement in the country’s wealth, economic and political future, and to galvanize citizen support for a democratic regime. Now is the time to act, before post-war business-as-usual creates de facto foreign and domestic spoils-of-war property right claims, leaving out a citizenry brutalized enough by a totalitarian regime, and in sore need of empowerment in their own future.

At around the same time, I found this Reuven Brenner article from the Asia Times, advocating a similar approach to achieving civil society in Iraq:

A possible solution is to first offer each Iraqi citizen an immediate stake, by committing to distribute a fraction of oil revenues, an equal sum to every Iraqi man, woman and child, with the remaining funds being managed by a properly structured trust fund. This idea roughly follows the very successful Alaskan model. Once this is done, powers can be delegated to lower, tribal levels. This sequencing gives a greater chance for rebuilding Iraq and the Middle East on sounder foundations. By looking at a sequence of historical events, we’ll see why.

As Mark Twain wrote, history may not repeat itself, but it sure rhymes. Let us see what rhymes, and what does not. …

Ideas have long lives. Embodied in institutions, they outlive their usefulness – and bring about instability. Ideas, which were initially useful in fighting misgovernment by foreigners and which were a response to growing mistrust among the increased population within each European “tribe”, were transformed into deeds and institutions. These institutions sustain myths, create habits, which are then exported to other countries. Habits of thought slowly harden into character – with the origins of thoughts and events that set this sequence in motion, long forgotten.

Oil money sustains both dictatorships and much outdated institutions and character traits. This is why the crucial first step in achieving stability in the Middle East is to disperse the funds among people living within the now recognized borders, rather than let it flow through the hands of unaccountable and corrupt rulers and governments. Unless the people within the present Iraq borders are given such tangible stake in the future, “democracy” and “constitutions” will become nothing but empty promises and worthless pieces of paper, with the vast majority of people mired in poverty and ignorance.

Brenner’s piece has a lot of good historical discussion in it, material that resonates with me right now because I’m reading David Fromkin’s A Peace To End All Peace, about World War I and the construction of the modern Middle East. It’s an extremely good book, very well written and full of information and analysis that enables the reader to think about the interwoven personal and geopolitical relationships involved. I just finished reading a section where Fromkin talks about political movements based on theories of nationalism in the late 19th century, so when Brenner says things like “ambitions based on nationalist principles are in conflict”, it really fits with my reading of Fromkin. I recommend both works.