So gas should be cheaper in Iraq than here, right?

I think everyone expects that. As the political situation there stabilizes, the oil supply from Iraq will increase. (According to the Department of Energy, Iraq's all-time peak oil production was in December 1979, at 3.7 million barrels daily. As of May '05, daily production had reached a level of 1.9 million barrels. Clearly, more can be done in the future.)

But the price difference between gasoline made from Iraqi oil, refined and sold here and gasoline sold in Iraq should basically consist of the cost of transportation plus the difference in refining costs and taxes.

So guess what Iraq does. I don't know how old this policy is, and whether it dates back to Saddam. There's no question, though, that its results are clear. Even to a member of the MSM. The policy I'm talking about isn't the one in the headline. It's down about 6 paragraphs.

This is the new policy they're enforcing (with questionable success), which is mentioned in the headline.

To save fuel, and to general confusion, the government has ordered half the capital's car fleet off the roads on any given day.

Tuesday was the first day of the new rule, and only cars with licence plates ending in an odd number could take to the streets.
This is the policy that caused the problem, which they've done nothing to address. The emphasis is mine.
Shortages have become inevitable, creating queues and a thriving black market for gasoline, which, because of subsidies, officially costs just over one U.S. cent per liter.
If that isn't a typo on Reuters' part, then that works out to less than 4 cents per gallon. Most cars here could fill up for less than a dollar. Does anyone have an incentive to reduce their usage of a product when they pay so much less than it costs to produce?

It doesn't matter whether the subsidy is a direct subsidy supported by payments from the government, or whether it's in indirect subsidy in reaction to an attempt by a government to control the price. In either case, demand will increase. And if the subsidy is indirect, as I described in my earlier post, there's no incentive for the supplier to maintain a supply equal to demand. The result is a shortage.

Update: Iraq the Model has some more information about the new driving limits. Notice what he says abot the price. There's a black market (due to the shortages). And the new policy is having the impact of reducing the black market price -- to about 40 cents/gallon, if my math is right.

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