Middle East Countries Slashes Energy Subsidies Amid Crashing Oil Prices

With global crude oil prices crashing, the Middle East energy subsidies have also been swept away, reported The National Business.

The UAE has switched its oil prices to market-based fuel prices, Abu Dhabi has raised its utility rates, and Saudi Arabia’s recent budget cut has slashed subsidies. Oman has even announced it will be eliminating energy subsidies. Bahrain declared it will gradually raise diesel and kerosene prices, while Kuwait’s finance ministry proposed to trim more than a third from handouts.

Three powerful forces are driving this change. Pressured by the oil price slump, Middle East countries are rushing to shore up budgets. Saudi Arabia’s budget deficit is forecasted to reach US $87 billion in 2016, if oil prices are at $40 per barrel, analyzed Robin Mills the head of consulting at Manaar Energy. He estimated the country’s financial reserves would dry up in seven years at this rate.

The country has decided to raise petrol prices up to 60%, gas by two thirds, ethane by 133%, and raise electricity prices for heavy users. Saudi Arabia’s subsidies reached $107 billion in 2014, with the investment bank Jadwa forecasting this to plunge to $61 billion this year. Simply put eliminating energy subsidies would cancel out most of the kingdom’s deficit.

The second cause is the ebbing level of global energy prices. U.S. pre-tax petrol prices reached $ 0.94 per liter in 2008, but has plummeted to about $0.38. Saudi Arabia petrol prices were raised by 60% and now are around US $0.24 for higher-grade fuel.

In UAE petrol and diesel prices have fallen since it reformed subsidies, tracking global oil markets.

According to Mills the third force is the power of example. Jordan, Morocco and Egypt have all be reducing handouts in recent years. Within the Gulf Cooperation Council (GCC), the UAE was in the lead. Of course high level of incomes, public transport alternatives and preponderance of expatriates make the reforms less politically problematic, but their success may have reassured governments elsewhere.

The third force is the power of example. Iran’s 2010 reform perhaps did not attract the attention it deserved in the Arab Middle East. But Jordan, Morocco and Egypt have all been chipping away at handouts in recent years. Within the GCC, the UAE has taken the lead. Of course, its high level of incomes, public transport alternatives and preponderance of expatriates make the reforms less politically problematic, but their success may have reassured governments elsewhere.

The subsidy reform wave in the Middle East highlights policy blockage over previous years. “Despite many warnings, most regional governments allowed subsidies to escalate to absurd levels,” wrote Mills. Prior to the reforms, governments including Egypt were spending more on fuel handouts than health, education and infrastructure combined.

But what can all these developments mean for the LED industry? While one could be optimistic that the raised energy costs would encourage Middle East consumers to turn to more efficient lighting. Yet, the effect from the anemic global economy might prevent LED industry from picking up in these areas, since LED luminaires remain an optional lighting device rather than a necessity, said a LEDinside analyst.

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