Between a rock and a hard place

At a time, when Egypt tries to put a brake on energy subsidies, a report issued last month by the Ministers Council’s Information and Decision-Support Centre showed that Egypt’s oil production has been on the decrease in 2007. The report said that Egypt is among the top countries that subsidize petroleum, making the prices of its products lower than international prices.

This fact comes at a time when Egypt’s oil production is on the decline. “Egypt’s crude oil production has decreased by 6.3% in 2007 to hit 710,000 barrels a day,” the report said. Egypt’s oil production in 2001 was 758,000 barrels a day. The downturn began in 2005, according to the report. The report added that local consumption of oil in 2007 increased by 18.8% to hit 651,000 barrels a day, up from 548,000 barrels a day in 2001.

The report reveals a number of facts regarding subsidies on oil products. “Egypt is in the 9th place of the list of countries that offer the highest subsidies on oil products. It subsidized oil products by 33 cents (LE1.9) per one liter in 2006,” the report added. Turkmenistan, Venezuela and Iran topped the list consecutively. Subsidies on oil, in fact, take the lion share of subsidies in general; around 72%. Out of LE83.7 billion worth of subsidies provided by the government on foodstuffs and other items, subsidies on oil was LE60.3 billion.

Of all oil products, gasoline tops the list of products most subsidized with 38.4%. It is followed by natural gas which takes 22.7% of subsidies on oil products (57 cents per liter which equals LE2.2).

The report shows the sectors that most consume oil products. Transportation, of course, came on top of these sectors which consumed 27.1% of oil products in 2006/2007. The industrial sector comes second with 20.7%, followed by the oil sector whose consumption stood at 20.2%.  As per natural gas, the power plants sector consumed around 58.2% of total production of Egypt during 2006-2007. The industrial sector comes second with 29%, while the transportation sector consumed 1% of natural gas production.

Although there are great efforts exerted by global energy companies to find alternatives to oil in the coming few years – given the sudden hikes in oil prices in the past year – the report predicts that oil will remain the main source of energy in Egypt up till 2020.
“Crude oil prices are expected to hit the $225 mark per barrel in 2012,” the report said. “However, the share of oil as an energy source will decrease by 32% to 35.2% in average in the period between 2010 and 2020,” the report added.

Given these facts, the government will undoubtedly be between the devil and deep blue sea. Raising the prices of oil products, especially gasoline, would incur public anger and increase an already high level of inflation. And keeping oil products’ prices at their current level would put more pressures on the state’s budget in light of expected increase in local consumption. Only the coming days will tell how the government will deal with such a critical issue.

The prospect of allocating more funds for subsidies on oil products ruffles the feathers of the government officials, especially the ministers of finance and petroleum. Minister of Finance Youssef Botros Ghali once said that it is impossible to continue subsidizing gasoline for an ever increasing number of vehicles – which increase by more than 250,000 annually. On the other hand, the minister of petroleum once said that growing local oil consumption makes Egypt looses millions of dollars that could have been earned if these products were exported.

This conundrum, as a matter of fact, makes the government caught between a rock and hard place.


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