Mideast Turmoil Keeps Gasoline at 45 Cents in Oil States

Subsidies in Persian Gulf states that keep gasoline prices as low as 45 cents a gallon are proving difficult to dismantle amid growing regional turmoil.

Ministers from six Arab Gulf nations delayed action to curtail the support when they met Sept. 11 in Kuwait, Ali Al-Omair, Kuwaiti Oil Minister, said that day. State-run Saudi Arabian Oil Co. warned in May that it will have “unacceptably low levels” of oil to sell in the next two decades if domestic power use keeps rising at 8 percent annually. The region currently supplies 24 percent of the world’s crude.

The oil-rich monarchies, which rank among the top per-capita energy consumers, have largely averted domestic discontent of the kind that sparked the Arab Spring protests and support for Islamic State in northern Iraq. Gulf governments are wary of alienating their own citizens, so changes to subsidies may take years, Robin Mills, a Dubai-based analyst at Manaar Energy Consulting & Project Management, said by phone yesterday.

“There’s a social issue around subsidies: They’ve been built into government policy and people are used to it now,” Saeed Khoory, chief executive officer of Dubai government-owned Emirates National Oil Co., said Sept. 23 in the United Arab Emirates city of Fujairah. “Subsidies are definitely helping push growth in demand.”

Price Gap

The gap between world oil prices and costs to Gulf consumers may widen if the wars in Iraq and Syria reduce production for an extended period. A U.S.-led coalition of five Arab nations began airstrikes against Islamic State in Syria on Sept. 23, and attacks since then have targeted oil refineries under militant control. Iraq pumps and exports most of its crude from a Shiite-dominated southern region, where Islamic State’s Sunni insurgency has made little impact so far.

Members of the Gulf Cooperation Council, comprising Kuwait, Saudi Arabia, Bahrain, Qatar, Oman and the U.A.E., are seeking to stem demand that the U.S. Energy Department estimates is growing at 5 percent a year on average, more than twice the global rate. Saudi Arabia, with the world’s 46th biggest population, was the sixth-largest oil consumer last year, according to data from BP Plc.

Saudi Subsidies

Saudi Arabia’s gasoline price of 45 cents a gallon (12 cents a liter) is the world’s cheapest after Venezuela, data compiled by Bloomberg show. The average U.S. price was $3.33 on Sept. 29, according to Heathrow, Florida-based AAA. The kingdom spent almost $25 billion subsidizing gasoline and diesel in 2012, more than any other nation, according to a December 2013 report by the Energy Institute at the University of California at Berkeley.

Subsidized fuel is “almost considered a birthright” in Middle Eastern countries, Robert Campbell, head of oil products research at consultant Energy Aspects Ltd., said today at a conference in Singapore. “This is a seriously major factor in rapid demand growth.”

All the Gulf countries subsidize electricity and gasoline for their citizens. Qataris get power and water for free. The average U.A.E. resident consumes more than twice as much energy as an American and almost five times more than a German, U.S. Energy Department data show.

“Every state has its method of addressing and dealing with subsidies, but we all agree it’s a challenge and not sustainable if we continue to stay at the current consumption level,” U.A.E. Energy Minister Suhail al-Mazrouei said in a Sept. 8 interview in Abu Dhabi.

Conservation Measures

The countries have sought to conserve oil and gas by investing in efficiency improvements and renewable energy. Qatar cut per-capita power use by 10 percent last year, according to state-owned Qatar General Electricity & Water Corp. Saudi Arabia plans to build solar and nuclear plants, while the U.A.E. is set to inaugurate its first reactor in 2017.

Dubai wants to generate 1,000 megawatts from solar power by 2030. The U.A.E.’s second-biggest emirate is also targeting a 30 percent cut in projected energy demand for that year, Saeed Mohammed Al Tayer, chief executive officer of Dubai Electricity and Water Authority, said in a May 22 interview.

Gulf nations can score some “quick wins” through investments, regulation, enforcement and awareness campaigns, Glada Lahn of The Royal Institute of International Affairs, known as Chatham House, said in a Sept. 22 e-mail. “But to get the change in an economy’s orientation, from wasteful and polluting to efficient and environmentally sensitive, they have to offer a plan for long-term price reform to reflect costs,” the London-based resource analyst said.

Saving Money

Brent crude’s 17 percent slide since June 19 may compel Saudi Arabia and other oil producers to act soon. The benchmark grade fell below $100 a barrel on Sept. 8 for the first time in 14 months and settled at $94.67 yesterday. It rose as much as 1.6 percent today and traded at $95.19 at 1:19 p.m. in New York.

“The general idea in cutting out subsidies is to save money,” Alexander Poegl, an analyst at JBC Energy GmbH, said by phone from Vienna on Sept. 11. “When oil prices are going below $100 and some exporters have constrained budgets, it’s about saving money and cutting spending.”

The U.A.E. last raised gasoline prices in 2010 and is likely to be the first of any Gulf states to boost them again, said Mills of Manaar Consulting. U.A.E. retail prices, the highest among the six monarchies, are still about half global market rates, he said.

Failure to reduce energy demand in GCC states could curtail hydrocarbon exports from a region with 29 percent of the world’s oil reserves and 23 percent of its gas.

“While these regimes desperately need to reduce domestic consumption of their main exportable resource, they are afraid of the political blowback that would come from raising prices,” Jim Krane, a Houston-based research fellow at Rice University’s Baker Institute for Public Policy and the author of a book about Dubai’s economy, said in a Sept. 22 e-mail.

“The monarchies have been asking their people to ‘please’ use less energy for years, to absolutely no avail,” he said.

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