Will Cheap Oil Spell the End of Cheap Energy in the Middle East?

Lower oil prices seemingly present a golden opportunity for Middle Eastern countries to roll back expensive domestic energy subsidies without risking popular fury. Doing so could bring plenty of benefits immediately, by shoring up wobbly budgets, and in the long term, by helping to husband energy resources earmarked for export.

But in a region where government largesse remains one of many regimes’ few tangible carrots, there may be a lot less maneuvering room than international bankers and credit analysts might think. Egypt and Jordan suffered public protests in recent years when they started rolling back energy subsidies. This week, fuel shortages again erupted in Egypt, and government officials blamed long lines and short tempers at gas stations on rumors of fuel price hikes. The United Arab Emirates is already experiencing an inflation jump after Abu Dhabi hiked power prices.

That means governments in the region will need to tread carefully as they work to trim back subsidies that collectively amount to hundreds of billions of dollars per year.

This may still be a good time for the regimes to try. Crude oil prices have fallen about 50 percent since last summer and are now parked around $50 a barrel in the United States and $60 a barrel in London. That could allow both oil exporters like Saudi Arabia and oil importers like Egypt to roll back costly subsidies without sparking popular outrage, like the protests last fall that helped topple Yemen’s government. Removing some subsidies is easier on consumers when energy prices globally are cheaper. And it’s easier to convince governments to act when their own budgets are under siege from falling prices.

“The spiralling-out-of-control of the fiscal burden of energy subsidies in recent years will render their reform increasingly unavoidable in a growing number of [Middle East and North African] economies,” Laura El-Katiri and Bassam Fattouh of the Oxford Institute for Energy Studies concluded in a paper last month. Moody’s, a ratings agency, just flagged the opportunity that cheap oil presents many governments in the region to reverse costly subsidy schemes.

Indeed, plenty of countries are already rolling back subsidies. Persian Gulf countries have taken steps to hike prices for electricity (the United Arab Emirates), diesel fuel (Qatar and Kuwait), and natural gas (Oman and Bahrain). Iran just increased domestic fuel prices again. Egypt jacked up fuel prices last summer. Jordan is continuing efforts to increase fuel and electricity prices. North African countries like Morocco and Tunisia are also redoubling their steps to make consumers pay something closer to market prices for energy.

Reform momentum is building because the cost of subsidies is so gigantic. Gasoline at the pump costs about $0.60 a gallon in Saudi Arabia and $0.80 a gallon in Kuwait; other Gulf states price gas at about $1 a gallon. Average electricity prices in Saudi Arabia are a fraction of what power costs in Europe or the United States. The IMF estimated that Middle Eastern and North African energy subsidies cost more than 8 percent of regional GDP per year, or more than $230 billion in 2011. The price slump has already cut the subsidy bill a bit, to about $200 billion per year.

Continued subsidy reform is urgent for countries that import fuel as well as those that export it. Before sharply hiking fuel prices last summer, Egypt saw nearly one-third of its budget going to fuel and power subsidies. That makes it harder to invest in things like infrastructure and education.

For oil exporters, whose budgets have been hit hard by the decline in crude prices, reining in costly subsidies is one way to avoid even bigger deficits. IMF officials in Oman last week urged the government to step up reform of energy subsidies to stanch the fiscal bleeding. Kuwait just slashed projected spending in the next budget by 18 percent, yet it still faces a massive deficit. And for energy-exporting countries, hiking bargain-basement prices is another way to curb runaway domestic energy consumption, which threatens to gobble up valuable resources that could be exported instead.

But though subsidy reform seems a no-brainer, in reality it’s trickier to pull off successfully. That’s due to a host of factors. To a large degree, cheap energy is one of the few governmental benefits that societies across the region enjoy, and many consider it their birthright. And because the better-off (who consume more energy) generally pocket bigger benefits than the poor, plenty of vested interests fight reform.

When regular citizens see one of their few carrots snatched away, anger quickly escalates. The highest-profile case came in Yemen, where the government’s meltdown owes a lot to the government’s botched effort to suddenly rein in energy subsidies. Houthis took advantage of massive protests over the government’s subsidy reform last fall, culminating in the fall of the Yemeni government.

Indeed, even four years after the outbreak of popular protests that led to the Arab Spring, countries in the region are still trying to defuse potential sources of unrest. Despite concerns over the impact of cheap oil on the national budget, Saudi Arabia’s new king showered billions of dollars on civil servants as soon as he took over, for example. Bahrain is again struggling with protests.

“The social contracts in place in many of these states increasingly have wealth distribution and subsidies left as the only real pillar still holding up regimes,” said Christopher Davidson, a Middle East expert at Durham University in the United Kingdom.

Even in places where the tender shoots of democracy are taking root, the pressure to take away decades-old entitlement programs in the name of healthy budgets is not sitting well. In Tunisia, where the Arab Spring began, government plans to placate the IMF with tax hikes and energy reform are again stirring grumbling in the streets. That gives more-authoritarian leaders something to think about.

“I expect we’ll hear lots of noisy conversations about the need to heed IMF warnings and reform, but we’ll see no real action from rightfully hesitant elites,” said Davidson. “The regimes don’t have any real wiggle room.”

Photo credit: MOHAMMED HUWAIS/AFP/Getty