Fiscally pressured gulf oil exporters rethink subsidies

Nov. 25, 2015
Little noticed in reports outside the Persian Gulf about consequences of sharply diminished oil prices are portentous changes astir inside the region.

Little noticed in reports outside the Persian Gulf about consequences of sharply diminished oil prices are portentous changes astir inside the region.

Oil-exporting countries are openly questioning the energy subsidies crucial, in varying degrees, to their political stability.

Reasons are compelling. Revenue declines associated with the crude-price crash have weakened national budgets already strained by energy-price subsidies. And the political risks of trimming or removing subsidies are lowest when energy prices are low.

Among gulf oil producers, the United Arab Emirates leads.

Early this year, the federation let electricity rates paid by expatriates—who outnumber native Emiratis—rise to market levels.

This summer, the UAE let managed transportation-fuel prices rise to market levels.

Last month, Ali Al-Naimi, Saudi Arabia’s oil minister, confirmed in response to a question that the kingdom is studying relaxation of subsidies, on which it spends an estimated $86 billion/year.

The touchy subject of energy subsidies also surfaced at an energy forum this month in Bahrain conducted by the Arab Petroleum Investments Corp. (APICORP).

In a live survey at the meeting, attended by more than 350 delegates, 34% of respondents favored subsidy reform when asked how oil-exporting countries best can manage lowered revenues.

Forty-five percent preferred diversification, and 16% favored spending cuts.

That officials of the gulf states even discuss subsidies out loud is remarkable, important, and reflective of the financial pressures generated by an oil-price plunge that began in mid-2014.

“These subsidies urge most of the people in the region not to rationalize while using energy,” UAE Minister for Energy Suhail Al-Mazroui said at the POWER-GEN Middle East conference in Abu Dhabi last month. “And as you may know, these figures are a great challenge for the budgets of the Arab world.”

If officials of other gulf governments agree with Al-Mazroui and act accordingly, economies in the region will change fundamentally.

Those changes will be permanent. Governments that succeed with subsidy reform will know better than to reinstate the largess when oil prices rebound.

(From the subscription area of www.ogj.com, posted Nov. 25, 2015; author’s e-mail: [email protected])