Lifting of Lebanon’s Oil Subsidies and Implications for Syria

EPC | 12 Sep 2021

The collapsing Lebanese economy and a raised possibility of lifting subsidies on oil derivatives could have repercussions for smuggling these commodities to Syria because of the price difference. In recent years, Lebanon has become an essential source for the supply of oil derivatives to Syria. However, very soon, the commodity would be subject to actual import prices in Lebanon. As this would end the feasibility of smuggling from Lebanon, the Syrian regime would lose an important source of oil derivatives being rationed in the country.

Background and Context

Historically, oil derivatives have been smuggled from Syria, which subsidizes the commodity, to Lebanon, which does not subsidize them or does it on a limited scale. Smugglers on both sides of the border benefit from the price difference to make huge profits. Syrians point toward fuel scarcity in their country, especially in areas close to the Lebanese border, due to smuggling and attempts by the Syrian regime to clamp down on them.

However, the situation reversed during the conflict in Syria, which led to the reduction in subsidies. When the Lebanese economy collapsed, the country started imposing indirect subsidies on oil derivatives in the country. As a result, smuggling operations took an opposite path, starting from Lebanon toward Syria, through tankers, illegal crossings, or even cross-border pipelines.

Currently, gasoline, diesel, and gas in the Syrian regime-controlled areas have two official prices: subsidized derivatives distributed in specific quotas according to a timetable based on a smart card, and another called free, subject to its actual price without subsidy. After those materials were steadily subsidized for many years, the conflict in Syria negatively affected the supply of oil derivatives and the regime’s ability to import and pay for them, leading to a scarcity of these vital commodities.

Thus, the smart card solution emerged, providing a limited subsidized quota of those materials to citizens and commercial and industrial enterprises, based on a schedule rarely adhered to due to corruption and supply shortage. On the other hand, the same oil derivatives would be made available officially and at a higher price, not subsidized for those who need additional quantities other than those available through the smart card.

It is almost impossible to assess the true extent of smuggling from Lebanon to Syria. However, an Information International report – Gasoline and diesel between smuggling to Syria and storage in Lebanon – compared the annual volume of oil derivatives Lebanon imports with the volume smuggled to Syria. It was calculated at a minimum of 5 million cans, subsidized by the Lebanese Treasury at approximately US$ 35 million. The estimated quantity of smuggled diesel amounts to 28 million cans annually, which costs the Lebanese Treasury an estimated subsidy of US$ 200 million.

Post-Subsidy Scenarios and Repercussions for Syria

Several exchange rates exist for the US dollar against the Lebanese pound (lira). One of them is 1,500 pounds, the official rate, and 3,900 pounds, another official price linked to bank deposits. Subsequently, there is subsidizing of some basic materials, and finally, an unofficial rate of nearly Lebanese pounds 20,000 for the dollar. This is the black-market price, which is considered the real price of the dollar. Subsidies are implemented through the Banque du Liban (Central Bank) sale of 85 percent of the value of oil derivative imports in dollars at 1,500, then 3,900, and finally 8,000 Lebanese pounds.

The rise in the sale price of dollars to import derivatives from 1,500 to 3,900 Lebanese pounds was followed by a rise in the price of oil derivatives in Syria. The move was interpreted as relieving the regime of the burden of the subsidies that exhaust its finances. It also sustained the smuggling of these materials from Lebanon to Syria by maintaining an encouraging profit margin for smugglers.

The problem of entirely lifting subsidies on oil derivatives in Lebanon raises multiple possibilities. The first scenario points to an increase in the severity of rationing in Syria, especially with the advent of the winter season. The demand for diesel for heating increases when smuggling from Lebanon stops, and the import of oil derivatives declines as a result. The high demand among Syrians for this vital commodity and the drop in imports due to the lack of profitability in smuggling from Lebanon would deepen this gap.

A possible second scenario indicates the start of an opposite but limited smuggling activity of Syrian-subsidized derivatives into Lebanon. Unsubsidized derivatives in Syria remain safe from smuggling as they do not yield a significant profit for smugglers. This situation would bring Syria’s derivative crisis to a new and unprecedented level. Syrian citizens in the regime-controlled areas would have to procure unsubsidized materials in the absence or shortage of the smuggled subsidized ones. Such a scenario would constitute an additional reason for the Syrian regime to lift subsidies on oil derivatives further or even completely. If prices become almost equivalent in both countries without subsidies, smuggling operations would stop automatically.

However, there remains a third scenario to which former Lebanese Minister Gebran Bassil recently pointed out. This scenario suggests that the smuggling from Lebanon to Syria would continue despite the lifting of subsidies in Lebanon. This is because the problem of oil supplies in the Syrian regime areas is related to the high import cost of those materials and difficulties in importing them due to the sanctions imposed on the Damascus regime. In repeated incidents in the first half of 2021, Israel has apparently targeted Iranian oil tankers and ships bound for Syria.

Conclusions

The continued smuggling of oil derivatives from Lebanon to Syria, even after the lifting of subsidies in Lebanon, would maintain the stability of the Syrian regime’s supplies of vital materials without harming the collapsing Lebanese finances. However, at the same time, it may draw US sanctions on the Lebanese parties involved in these operations.

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