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.