June 14, 2013

Energy subsidies hamper Middle East

The ICAEW report Economic Insight: Middle East is produced by Cebr, ICAEW’s partner and economic forecaster. Commissioned by ICAEW, the report provides its 140,000 members with a current snapshot of the region’s economic performance. The report undertakes a quarterly review of Middle Eastern economies, providing a unique perspective on the prospects for the region as a whole and for individual countries against the international economic backdrop. We focus on the Middle East as being the Gulf Cooperation Council (GCC) member countries (United Arab Emirates [UAE], Bahrain, Saudi Arabia, Oman, Qatar and Kuwait), plus Egypt, Iran, Iraq, Jordan and Lebanon.

 

The Middle East is slowing in 2013, but still outpaces the global economy.

  • The Middle East, and in particular the GCC’s oil-exporting countries, bucked the trend of relatively weak growth in 2012, with a robust expansion just short of 4.0% across the region, and 5.8% in the GCC. Primary factors were the oil sector and a substantial boost in public spending. An enhanced level of government investment in infrastructure and increases in spending including substantial pay increases for public sector workers, in turn translating into higher consumer spending, boosted growth in Kuwait, Qatar, Saudi Arabia and the UAE in particular.
  • The Middle East economy is slowing from the breakneck expansion of the last two years, however. High oil prices sustained robust growth across the region but this trend is now turning around, with oil production contracting this year in Saudi Arabia, the region’s largest economy. While public spending and investment continue to drive economic growth, particularly in the GCC countries, 2013 is likely to see the slowest expansion since 2009.

 

Can the oil economy meet growing energy demand as well as driving export-led growth?

  • With the oil economy weakening and regional economic growth taking a dive, the question is whether the boom of 2011 and 2012 was just a flash in the pan driven by high oil prices.
  • There are more fundamental questions over the  sustainability of the current economic model in the Middle East. As the population grows and energy demands rise, the region needs to ask itself whether or not oil supplies can provide for domestic energy needs and continue to drive economic growth through export earnings.
  • Energy consumption across the region has nearly tripled since 1990 and grew by 72% between 2000 and 2010 – about three times faster than the rate of growth across the world as a whole, driven by a growing population and the rise of energy-intensive industry – not least oil and gas extraction. This phenomenal growth of energy consumption is outstripping that of energy production across the region.

 

Substantial energy subsidies distort energy demand even further

  • Socio-economic policies across the Middle East have failed to encourage efficiencies or the need for diversification.Fuel and electricity are very cheap in the region – a litre of petrol costs just $0.50 on average, compared to a world average price of $1.90. This is in no small part because both oil exporting and importing countries in the Middle East have a long history of providing households and firms with subsidies on energy.
  • Ultimately, however, resources used to subsidise energy cannot be used to improve competitiveness in other ways. Reduced energy subsidies, energy source diversification and competitiveness promotion across the economy are vital in order to create good long-term growth prospects.

 

For more information and a copy of the report, please visit ICAEW’s website.

 

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