Let them eat oil
By Erik Mielke, who is a partner at Namir Capital Management LLC, a New York-based investment management firm that invests in emerging markets. The opinions expressed are his own.
The winds of change are forcing fundamental political and economic shifts across the Arab world. But one area of economic reform is likely to be brought to a stop as regimes respond to popular protests with populist measures. These initiatives include extending and expanding the region’s massive energy-price subsidies. For the rest of the world, this matters tremendously. One additional barrel consumed in Tehran or Riyadh is effectively one less barrel for the export market, and that means higher global oil prices.
Fueled by petrodollars and subsidized oil, energy consumption has been rising rapidly throughout the region. In the 10-year period to 2009, oil consumption in Middle East and North Africa rose by 50%, or 2.7 million barrels per day, second only to China’s rate of growth. In the same period, the region’s oil production only rose by 2.5 million barrels per day. The net result was a decline in oil exports from the world’s key producers.
Current energy subsidies are huge. The International Energy Agency’s most recent estimate for global fossil-fuel subsidies was $312 billion in 2009. That number is likely significantly higher in 2010, as the market price for oil rose by nearly one-third, and will be even higher still in 2011 (at the recent peak in oil prices in 2008, global subsidies reached a staggering $558 billion). Iranian subsidies, alone, amounted to $66 billion in 2009, a budget-busting 20% of the country’s GDP, with Saudi Arabia and Russia in second and third place with $35 billion and $34 billion, respectively.
In an attempt to placate protestors, regimes across the region have now increased these handouts and subsidies. Most of the initiatives have a one-year window, but will likely remain in place for much longer in some countries.
In Kuwait, the government announced in January a 1,000 dinar (approximately $3,600) cash windfall to each citizen and free food staples until March 2013 (these measures do not apply to the foreign workers who make up two-thirds of the population). Similar measures have been introduced in Bahrain, Oman and Saudi Arabia in the last two months.
In Jordan, an importer of oil, the government responded to January’s unrest by reintroducing subsidies for gasoline and kerosene. These subsidies had been lifted in 2008 when Assam’s oil addiction became too expensive for the regime to support (Jordan had previously enjoyed many years of discounted oil from Saddam Hussein). Neighboring Syria has expanded its fuel-subsidy program with additional allowances for public-sector workers.
Ironically, the one bright spot on price reform has been Iran. A combination of sanctions and refinery constraints led the government to hike gasoline prices three-fold in December 2010 to $1.44 per gallon (roughly $60 per barrel) for a rationed quantity. At the time, the government avoided serious unrest through a combination of a heavy security presence on the streets and cash sweeteners. It is doubtful that the regime would have attempted a similar price hike in the current political environment, and it is unlikely that it will rush to match the $20 per barrel increase in global oil prices since December. Similarly, in Saudi Arabia, initiatives to reduce its massive energy subsidies have moved off the agenda.
The subsidy challenge is not unique to the greater Middle East, though. Demonstrations and strikes in Bolivia forced the government to reverse reductions in subsidies for gasoline and other fuels. Meanwhile in Kazakhstan, far from the Middle East in miles but not so distant in mindset, President Nazarbayev recently proclaimed a People’s IPO to share the nation’s wealth with the ordinary folks of the Central Asian nation.
The international focus has thus far been on the impact on the supply of oil from the revolts across the region. This is understandable, given the disruption to Libyan supplies and the threat of further strife. However, enabled by rising oil revenues and fueled by popular demand, the untold, subtler story of higher oil consumption could have a more enduring impact on global oil prices.
Photo: Cars are reflected on bottles of gasoline as they are sold on a street in Indonesia’s South Sulawesi province on February 22, 2011. High oil prices pose a danger for global economic growth and industrialised countries stand ready to release oil from stockpiles to meet any Middle East supply disruptions, chief economist of International Energy Agency Fatih Birol told reporters on the sidelines of an energy conference in Indonesia on Tuesday. REUTERS/Yusuf Ahmad