Have a Good Drown

The odds of an acceptable outcome from America's Iraq intervention are, despite a steady drizzle of demoralizing attacks, quite high. But the odds for a truly good outcome -- one leading to the creation of a prosperous Iraq bolstered only behind the scenes by a low-visibility American presence -- are less than even.

A huge part of the reason, and perhaps the most important single factor in Iraq's future, is the egregious fuel subsidy instated by Saddam Hussein and preserved through the transition. The official price of fuel is as low as three cents a gallon [sic]:

In theory, the Iraqi government buys fuel from neighboring countries at market rates and then resells it to Iraqis at cheaper subsidized prices. Subsidized diesel, for instance, was sold by the government for less than three cents a gallon for most of 2005, meaning that a 9,000-gallon tanker truck carried fuel officially worth around $250. But the same fuel was worth perhaps a dollar a gallon on the black market.

With typical rates of $500 for protection money or police bribes and $800 to pay the truck driver, a smuggler could make at least $7,450 by bringing in fuel from Jordan, Syria or Turkey, according to Alak's report to the Oil Ministry.

After filling their trucks in neighboring countries, the drivers sell their load at a higher rate on the Iraqi black market. The beauty of the system from the smuggler's standpoint is that if arriving at an Iraqi fuel depot with an empty truck cannot be smoothed over with a bribe, the truck can be filled again elsewhere in Iraq at the cheap subsidized price.

After fulfilling the contract by delivering that load, Alak said, the truck driver can make an extra profit on the way back by filling up with cheap gasoline before leaving Iraq. He then crosses the border into one of the neighboring countries and unloads for the lucrative market price there. Even if the driver illicitly sells only a fraction of his load, the profit from the double-dipping can be considerable.

Smuggling, of course, is a criminal source of funds; in Iraq, where the line between criminals and terrorists is blurred to nothing, this means that smuggling funds terrorists. This is most explicit when the terrorism takes the form of pipeline attacks, which then increase the cross-border flow of petroleum and ease smuggling. Further, the incredible cashflow required to sustain this level of subsidy is inevitably a magnet for corruption. As Ralph Peters noted of Pakistan in When Democracy Fails,

About 3,000 schools funded by the government were found to be non-existent "ghost schools." Rural landholders and party hacks had pocketed the money.

Corruption is a slower threat to Iraqi government than terror, but even more potent. Iraqis have shown the courage to defeat the latter, if they have a future to believe in. But if corruption undermines that belief, then the dark waters of terrorism and transnational crime will flood through the breach.

The fuel subsidy is like exposed meat. It is already breeding theft and violence, of a magnitude comparable to the strength of Iraq's infant government. It will be a fatal quagmire if is it not addressed.

[Cross-posted from Chequer-Board.]