Are days of cheap petrol in the GCC over?
The sharp reduction in oil prices over the last two years has resulted in higher petrol and diesel prices in the Gulf Cooperation Council (GCC) countries. This and other consequent economic reforms signal the new normal in a region that has traditionally used oil wealth to promote subsidies and welfarism.
Oil prices rose to over $55 a barrel after an output cut deal between the Organization of the Petroleum Exporting Countries (OPEC) and non-OPEC producers at the start of 2017. But it dropped to a low of $47 in March and was about $52 following US missile strikes in early April.
Oil prices recovered initially following key oil producers committing to cut production by 1.8 million barrels per day to try and shore up prices. Oil prices are about $10 a barrel higher in 2017 compared to last year’s average. But other factors such as a continuing global economic slowdown and the resultant low demand for oil, as well as recovering US shale production have hindered further dramatic change.
Whichever way one looks at it, the reigning prices are a far cry from the highs of about $115 a barrel in 2014. With a recent Bank of America Merrill Lynch report forecasting that oil prices are expected to average $50 to $70 per barrel through 2022, the GCC governments would be looking at more austerity, subsidy removals and economic diversification to augment revenues and regulate budget deficits.
With regard to subsidy cuts, all the GCC countries have increased fuel prices during the last two years. For example, gasoline in the UAE is linked to international oil prices since August 2015. As a result, fuel prices have increased and fluctuated every month.
Following suit could be Saudi Arabia, which wants domestic fuel prices to reflect international levels by 2020. Even after increasing prices by about 50 per cent in 2015 as part of its first generation economic reforms, the gasoline prices in the kingdom remain among the cheapest in the world. But this may end with plans to increase petrol and diesel prices by another 30 per cent later this year.
Reports suggest that the Saudi fuel price hike may be associated to “The Citizen Account”, from which lower and medium income Saudi citizens could get cash benefits. This is being seen as a step to cushion hardships and mollify possible public discontent.
Though these price hikes have been implemented over the last two years, they have been part of the long-time reforms suggested by international financial institutions like the International Monetary Fund (IMF) and the World Bank. The push has been to either cancel or reduce energy subsidies to shore up the budget, increase fuel efficiency and educate people about environmental concerns.
In 2015, the IMF reported that petroleum subsidies in the UAE were about $7 billion, with the entire energy subsidy package totalling a whopping $29 billion or 6.6 per cent of the country’s Gross Domestic Product.
Following the announcement of the first round of fuel price hike, UAE’s Minister of Energy Suhail Al Mazroui said: “The decision to deregulate fuel prices has been taken based on in-depth studies that fully demonstrate its long term economic, social and environmental impact.
“The resolution is in line with the strategic vision of the UAE government in diversifying sources of income, strengthening the economy and increasing its competitiveness in addition to building a strong economy that is not dependent on government subsidies…It is also anticipated to improve the UAE’s competitiveness while positioning the nation on international indices.”
In other GCC countries, fuel prices are expected to go up in Qatar soon, with plans to review them every month; in Bahrain, the cost increased between 50 and 60 per cent in August 2016; and in Kuwait, fuel prices rose between 41 and 83% in last September.
In addition, the Kuwaiti parliament cleared a government-sponsored bill to raise electricity and water tariffs paid by expatriate residents and businesses. The first such increase in nearly half a century will become effective in September 2017.
Such drastic measures followed after Kuwait posted a budget deficit of $18.3 billion in the 2015/2016 fiscal year, after 16 years of surplus budgets owing to high oil prices. During the 2016/2017 fiscal, Kuwait is likely to face a deficit of $29 billion.
In Oman, the cost of fuel shot up nearly 75% after the government scrapped its fixed-price policy in January 2016. This February, Omanis protested against rising costs, which forced the government to cap petrol price at the current rate in order to support “deserving citizens”. It was announced, however, that diesel and higher grade petrol prices would continue to remain linked to international crude oil prices. This has led to diesel price hitting the highest in Oman’s history.
Oil revenue contributes more than 80% of Oman’s total income. While it earned an average of $66 per barrel in 2015, it dropped to $39 in 2016, resulting in mounting deficit.
Conservative estimates suggest that a range between $70 and 90 a barrel is the desired price for the GCC countries to achieve a balanced budget, without withdrawing subsidies. Anything less means drawing from their reserves or sovereign wealth funds or borrowing from local or international lenders.
All this means that in the new era of lower oil prices, the region’s governments have to get used to reduced energy revenues, budget deficits and lower public spending. And, people have to walk out of their comfort zones and get used to a life of lower subsidies and higher cost of living, the next taste of which will be in the form of 5 per cent VAT beginning 2018.