Despite the recent campaign waged by an independent newspaper about the cancelation of energy subsidies followed by a series of ministers’ announcements last month, it did not in fact catch the eye as the government’s decision is a one-year old

The cancelation of energy subsidies is not a fresh governmental decision. The Energy Committee of the National Democratic Party (NDP) submitted a working paper during the annual NDP conference term last year, which included the country’s plan to eliminate energy subsidies gradually from 2008 to 2013 and will be effective starting in 2014.

In addition, Eng. Rashid Mohamed Rashid, Minister of Trade and Industry, announced that the government is back to resume its plan to eliminate support for energy during 2010, added that the plan had been announced within the decisions of May 2008, which claims that the government to lift the subsidies gradually over a five-years period and so far, 20 percent of the energy subsidy in 2008 was cancelled, but due to the current global crisis, the government has temporarily suspended its plan in 2009.

Similarly, Dr. Youssef Boutros-Ghali, Minister of Finance, declared also last month that the government plans to abolish the subsidies on energy petroleum products, fuel, electricity as well as others products, by 2014 as they will be supplied to the Egyptian citizens at their real cost with the exception of butane pipes, which will be subsidized by a sum of cash to the beneficiaries. Furthermore, he declared that the government plans to resume its plan to eliminate subsidies for energy utilized in factories during 2010.

Dr. Ghali’s declaration was the sparking plug for the media to thrash out the issue again after it was firstly published last year. Nevertheless, as a result of tackling the issue again, it raised mixed reactions of experts regarding the resolution and its pros and cons. Some supported the resolution because of its positive effects on the long and short terms, while others were against the decision since they focused on the low-income citizen who will be the most affected by such decision.

“Presenting the petroleum products at their real costs will lead to the rationalization of energy consumption of all kinds, which in fact suffers from severe wasting,” a petroleum expert told Egypt Oil & Gas.
“The Egyptian citizen is known to be an extravagant consumer of energy products, especially oil and electricity since they are subsidized and he does not feel the real value of the subsidized products,” he added.

The expert, who preferred to be anonymous, believes that a gradual increase in salaries in parallel with the removal of subsidies is a must so as to avoid the negative effects, which will have an impact on the Egyptian street. He also asked for customizing part of the amount appropriated to subsidize the energy to the wages of the workers after canceling the energy subsidies, especially low-income or to allocate of the remaining part to bridge the budget shortage. 

“The removal of subsidies would reduce the burden on the government and provides new resources that can be directed to other pressing issues such as education, health and utilities. Moreover, the trend of most of the world is moving towards presenting goodies at their real costs.”
While some opponents of the resolution said the biggest victim of this decision is the low-income citizen, adding that the government should not export gas to other countries to preserve it to the Egyptian consumer so as not to place the burden of the removal of subsidies on the citizen.

An official source at the Ministry of Finance, told Egypt Oil & Gas that the goal of the abolition of energy subsidies is to rationalize the consumption of energy, particularly that the world is now heading for the policy of rationalization regarding the consumption of fossil fuels to avoid emissions of carbon dioxide, known as the global warming phenomenon that occurs as a result of fossil fuel wastes.

“When the government decided to abolish energy subsidies, it aimed primarily at low-income citizens who are the focus of the subsidy plan,” the official source explained. “The energy subsidies in the budget for 2008/2009 reached 70 billion Egyptian pounds and it will be reduced in the 2009-2010 budget to 52 billion Egyptian pounds, indicating that a large part of the subsidy does not reach the low-income citizens.”

Asked how the low-income citizen will benefit from canceling the energy subsidies and raising the price of gasoline, he emphasized that the low-income people do not have cars, but as long as they got cars they will come out of the definition of low-income people.
He added that the support which was for petrol and was estimated in the 2008-2009 budget by nine billion Egyptian pounds will be directed to the public transport and frequented by the citizens, adding that in case of removing subsidies on the gasoline price, it will be two pounds and a half for the 90-octane gasoline per liter.

“The cancelation of the energy subsidies will come out with involving the private sector in several fields, including construction of gas and diesel stations, and then attraction of investments to the country intended to raise foreign exchange, high growth rates after reaching last year to eight percent as a result of such investments,” he clarified.

He noted that the Cabinet decided earlier this year to set up an independent union for oil and gas affairs, and this device aimed at coordinating efforts between the private sector and consumers. Besides, the wages will be higher as a result of an increase in the rates of growth and competitiveness of companies in providing the highest quality petroleum products at an affordable price since the private companies seeks profit.

“In the case of rise of diesel and gasoline prices, the government here will work to regulate prices of basic goods… Pointing out that Egypt import 50 percent of petroleum products, which are estimated at 35 million tons worth large amounts of money. While there will not be a subsidy for the petroleum products, therefore it will pave the road to the private sector to import these products and sell them with their real prices. In addition, the government will control the profitability of those companies so as not to exceed 20 percent of the original price.”

Weighing the pros and cons
Theoretically, any measure that keeps prices for energy consumers below market levels or for energy producers above market levels, or that reduces costs for consumers or producers, may be considered a subsidy. Energy is most commonly subsidized through price controls, which keep prices below the full economic cost of supply. They are most common for electricity and natural gas, but are still important in some countries for oil products. The extent of under-pricing is generally bigger in countries where the energy sector is state-owned and where a significant share of production is exported.

Generally, governments tend to intervene in energy markets by providing subsidies in order to reduce or maintain household prices for social reasons, or to protect national industries from foreign competition. However, previous experience has shown that subsidies can distort markets, be costly to manage, and are susceptible to abuse. Specifically, energy subsidies to fossil fuels can:

  • Place a heavy burden on government finances
  • Stunt the potential for economic growth
  • Distort international trade
  • Deter private and public investment in the energy sector
  • Discourage energy conservation and hinder the expansion of distribution networks
  • Impede the development of competing technologies that may be more cost-efficient and environmentally friendly.

On the other hand, the main arguments for energy subsidies are:

  • Economic benefits – subsidies in the form of reduced prices are used to stimulate particular economic sectors or segments of the population, e.g. alleviating poverty and increasing access to energy in developing countries.
  • Employment and social benefits – subsidies are used to maintain employment, especially in periods of economic transition.
  • Subsidies are used to ensure adequate domestic supply by supporting indigenous fuel production in order to reduce import dependency.

The below table shows the distribution of subsidies budget in the fiscal year of 2008-2009, which counted for approximately 70 billion Egyptian pounds,

Product
Cost
Percentage
Gasoline
9 billion
12.8%
Diesel
33 billion
47%
Butane gas
13 billion
18.5%
Mazut
7.5 billion
10.7%
Gas
8 billion
11.4%

 

The below table shows the distribution of subsidies budget in the fiscal year of 2009-2010, which has been decreased to 52 billion Egyptian pounds,

Product
Cost
Percentage
Gasoline
7 billion
13.4%
Diesel
24 billion
46%
Butane gas
11 billion
21%
Mazut
4 billion
6.9%
Gas
5 billion
9.6%

 

Eng. Sameh Fahmy, the Minister of Petroleum, received a report from the Petroleum Affairs sector in the Petroleum Ministry on the indicators and results of the fiscal year 2008-2009, which stated that the petroleum sector achieved the highest economic growth rate compared to the country’s different economic sectors and contributed by up to 17.5 percent in the rate of economic growth of the country higher than the 8.3 percent achieved in 2008. The report showed a double increase in the volume of the oil sector foreign investment in the fields of exploring and development, from 33 to 67 percent of total investments of Egypt. 

Furthermore, the report emphasized that despite the decrease achieved in the total value of the petroleum exports and imports, the petroleum sector succeeded in achieving a surplus in the petroleum trade balance stood at nearly $5 billion. The success of the sector in achieving the account of 64 petroleum discoveries, including 40 crude oil discoveries, and 24 discoveries of natural gas, resulted in the addition of new reserves amounted to about 468.5 million barrels of crude oil and condensates, about 3.4 trillion cubic feet of natural gas, raising the total reserve of Egypt’s proven oil crude and condensate production to around 4.4 billion barrels and 77.2 trillion cubic feet of natural gas reserves in addition to the achievement of a  record in the total of Egypt’s production of crude oil, condensate and natural gas with some 81 million equivalent tons, reflecting an increase of 6.5 percent.

Environmental protection target
Many energy-subsidy schemes are harmful for the environment. Subsidies that encourage the production and use of fossil fuels inevitably have some harmful environmental effects. By encouraging higher consumption, they lead to higher emissions of air pollutants and greenhouse gases as well as other forms of environmental damage, such as water contamination and spoiling of the landscape. The Kyoto Protocol explicitly requires a reduction of subsidies that encourage greenhouse-gas emissions. But subsidies to fossil fuels can also have a beneficial impact on the environment. For example, encouraging the household use of oil products can reduce deforestation in poor rural areas otherwise dependent on firewood.

World leaders at the G20 meeting in Pittsburgh announced that they would phase out fossil-fuel subsidies in the medium term. The G20 (actually 19 countries plus the European Union (EU) and international financial institutions) accounts for 80 percent of greenhouse-gas emissions. The International Energy Agency estimates that poor countries, defined as those outside the Organization for Economic Co-operation and Development (OECD), spend $310 billion a year on such subsidies, mainly for petrol. But because the rural poor use little fossil fuel, these mainly benefit middle-income and higher-earning urban types. Rich countries also subsidize fossil fuels, by some $20-$30 billion annually. The IEA and OECD calculate that eliminating fossil-fuel subsidies would result in a 10 percent reduction in global greenhouse-gas emissions by 2050.

International side
The response to the American President Barack Obama’s speech at the UN has been tepid, but buried in it was this nugget, “I will work with my colleagues at the G20 to phase out fossil fuel subsidies so that we can better address our climate challenge.”

According to a recent analysis by the Environmental Law Institute, the U.S gave out $72 billion to oil, gas and coal companies between 2002 and 2008. Meanwhile, renewable energy received $29 billion worth of subsidies, though $16 billion of that went to ethanol.

Eliminating the pollution that comes from fossil fuels is one of the administration’s priorities. Scrapping subsidies is one way to go about it. Considering oil companies were making record profits last year, it will be hard for them to complain too loudly. And we can’t picture many politicians coming out publicly in favor of subsidies for fossil fuels.
But, will Obama actually scrap fossil fuel subsidies? Indicators highly doubt it. The industry just would not allow it. It could easily be turned into an issue about jobs. Plus, energy prices would rise. No politician wants to be culpable for raising your energy bill and costing someone a job.

A recent study by the OECD shows that global energy-related CO2 emissions would be reduced by more than 6% and real income increased by 0.1 percent by 2010 if all fossil fuel subsidies in the industrial and power sectors were removed.

By eliminating hidden government subsidy costs, it would raise the price of a gasoline to about $5.28 per gallon making the typical fill-up of the average mid size 16 gal tank vehicle cost over $84 per visit.

Today, the U.S imports more than 64 percent of its oil consuming a total of 22 million barrels per day. Of this amount, America generates 8.8 million barrels domestically with the remaining (13.2 million barrels) imported each day.

It is estimated Arab sovereign wealth funds owned over $3.8 trillion in assets at the end of 2008 and set to reach $14 trillion by 2018, equivalent to America’s projected gross domestic product, gross domestic product (GDP).

The U.S dependency on oil from unfriendly countries that are either politically unstable or at odds with the U.S subjects the American economy to occasional supply disruptions, price hikes, and loss of wealth, which, according to a study commissioned by the U.S Department of Energy, have cost us more than $9 trillion present value over the last 30 years significantly increasing our trade deficit. Oil imports account for almost one-third of the total U.S deficit and, hence, are a major contributor to unemployment. For example, the accelerated development of biofuel, solar and wind energy industries could generate hundreds of thousands of domestic jobs, according to the U.S Department of Energy’s $3 billion Energy Recovery & Tax Incentive Act 2009.

The President’s remarks point to the fact that many countries provide billions of dollars in subsidies and tax breaks to aid coal, oil, and natural gas companies. The Environmental Law Institute estimates that from 2002-2008, the U.S spent $72 billion dollars in subsides to the fossil fuel industries.

In conclusion, ending subsidies for fossil fuels is a good idea but it should be coupled with policy that eliminates subsidies provided to all energy sources. Subsidies create complacency within the industry and direct money that could be used more efficiently elsewhere. The private sector investment in energy research is actually larger than many might think. True breakthroughs in energy technology take time but the private sector has been generating marginal improvements in efficiency for decades.

Eliminating subsidies for fossil fuels only to relocate the money in green energy industries is the wrong path. Wind, solar, and ethanol are not new ideas – the government’s effort to subsidize or mandate chosen winners is bad policy that has persisted since the 1970s. Ethanol, for example, has been subsidized since 1978, originally with the promise that the industry would become viable within a few years, go off the dole and compete in the marketplace. But this has never happened. Instead, Congress passed a huge expansion of the ethanol mandate, essentially forcing Americans to use more of it even as it continues to be heavily subsidized.

By Ahmed Morsy
Tamer Abdel Aziz

 

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