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Gulf economies embark on reforms as oil prices plunge
Posted Date 2015/12/29 22:07

Abu Dhabi: Gulf countries are undertaking reforms to cut subsidies and increase fuel prices as oil hovers near eleven year lows on abundant supply and slowing demand.


Bahrain will be increasing fuel prices starting from Friday, according to Bahrain News Agency. They haven’t mentioned how much the increase would be but said the new move would contribute to providing financial savings and rationalising energy consumption.


Bahrain becomes the third country in the Gulf region to bring in reforms in the energy sector after UAE and Saudi Arabia.

Saudi Arabia on Monday announced that they would raise fuel prices by 50 per cent as the country posted a record $98 billion (Dh360 billion) budget deficit in 2015 due to the sharp fall in oil prices.


Oman which is losing revenue in a big way could be the next one in the list, analysts said.

“Probably, Oman would be the next one to take steps to introduce fiscal reforms because you got a smaller producer of oil and lost some money similar to Bahrain,” said Edward Bell, a commodity analyst at Emirates NBD.


He said Qatar and Kuwait are probably in a safer position.

“Kuwait historically has actually had problems in under spending. It has bit of a better fiscal position to be in. Qatar again is quite similar in that respect.”


Oman is losing $55 million (Dh202 million) a day due to low oil prices and is aiming to cut costs, Mohammad Al Rumhy, Oman’s Minister of Oil and Gas told Abu Dhabi International Petroleum Exhibition and Conference in November.


Difficult fiscal burden

According to Bell, there is awareness among Gulf countries that they can’t bank on oil prices staying very high for protracted period of time like in 2010 to halfway through 2014.


“As a result maintaining subsidies particularly in the energy sector imposes really difficult fiscal burden on the governments. I think if the governments going to take the time to do it, right now is the time when the prices of oil, gasoline, diesel and all these kind of products are quite low so the net impact on the consumers is less.”


Oil prices plunged by more than 50 per cent in the last one year as supply outstrips demand. From more than $100 per barrel, oil prices dropped to less than $40 per barrel in recent times. Global benchmark brent was trading at slightly less than $37 per barrel at 03:28 PM UAE time.


In a landmark decision in July, the Ministry of Energy in the UAE deregulated fuel prices and a new pricing policy linked to global prices was adopted. Following the decision, diesel prices reduced by 24 per cent and petrol price had increased by 29 per cent. However, the trend did not continue and fuel prices fell in the subsequent months as global oil prices dropped.


Direct cost

Reducing subsidies allows governments to improve their fiscal balance by collecting higher revenue through domestic oil companies, Mathias Angonin, an analyst from Moody’s Investors Service Middle East told Gulf News.


“If they lead to price increases, subsidy reforms could also dent domestic consumption, which in turn could free up additional oil for export.”

Energy subsidies represent a direct cost of 3.4 per cent of GDP for GCC governments, and petroleum accounts for about two-thirds of energy subsidies in the GCC, while electricity and natural gas together represent another third.


Ahead of the GCC, a number of emerging market economies have implemented energy subsidy reforms in recent months, including Egypt, India, Malaysia.


“Lower energy prices make it easier for governments to link domestic prices to international prices while limiting the negative impact on domestic sentiment and avoiding short-term inflationary pressures,” Mathias added.

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