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With rising global oil prices, gov’t trims diesel subsidies

Many international economists are warning that skyrocketing oil prices on the global market could portend tough economic times to come. But in Egypt, the impact has already hit home, as the state spends ever greater amounts on rising energy subsidy payments. In an effort to rein in expenditure, therefore, the government last month raised the price of subsidized diesel fuel, igniting protest from a number of sectors, particularly those of industry and transport.

Keeping fuel prices affordable to the masses set the government back £E 23 billion last year. By mid-2004, Egypt had already spent a total of £E 28 billion on energy subsidies, according to Tamer Tantawi, a business analyst for Pico Energy Research & Analysis. “If the trend continues, we’ll face problems,” said Tantawi.

In August, crude prices peaked near the $50-per-barrel mark on the New York Mercantile Exchange. Since then, they have remained above $40, mainly on concerns about the ability of oil exporters to meet unexpectedly high world demand. In a symbolic move, OPEC decided at a mid-September conference in Vienna to increase output quotas by a million barrels a day. Still, as OPEC countries are already producing at maximum capacity, the decision – while being an indicator of how seriously the cartel takes skyrocketing prices – isn’t expected to yield any practical effects.

Despite Egypt’s being – barely – a net petroleum exporter, export receipts from the relatively small local oil sector aren’t enough to offset the cost of fuel subsidies. “This means the subsidy cost is increasing at the same time that oil production is declining,” noted Tantawi. Growing domestic energy demands – coupled with the depletion of the nation’s aging oil fields – has raised the prospect that Egypt might become a net oil importer within five years.

In a bid to ease subsidy costs, therefore, the government on September 9 announced a 50-percent increase in the retail cost of diesel fuel, from £E 0.40 to £E 0.60. Defending the move, prime ministerial spokesman Magdi Radi said the next day that, “The government spends some £E 5 billion annually on subsidizing diesel fuel, and prices have remained unchanged for 10 years.” He added that the real cost of diesel was closer to £E 2 per liter.

While Radi conceded that the transport sector would be affected by the increase, he asserted that fare jumps for mass transportation wouldn’t exceed 6 percent. Radi also pointed out that drivers affected by the move would be compensated by last month’s concurrent reductions in custom tariffs on a variety of vehicles (see story, page 37).

But while government officials insisted the decision wouldn’t dramatically affect the cost of goods or transport, bus and microbus fares immediately jumped by as much as 100 percent in some places. In Luxor and Aswan, bus fares rose 50 percent, reportedly leading to a crackdown on price-jackers by the ministries of interior and local development. In some Delta governorates, meanwhile, microbus fares jumped 100 percent for long-distance trips and 50 percent for short ones. “I used to pay £E 1.5 from Kanater to Banha, but all the microbus drivers told us the fare’s now £E 3, and that those who don’t like it can get out,” said Mahrous El Sayyed, who does his military service in Banha.

In Cairo, though, microbus drivers have been more reluctant to raise fares, fearing as-yet-unclear penalties. “I wanted to raise the fare by at least 25 percent to cover my costs, but if I do this now, I’ll be imprisoned,” said one driver in Tahrir Square. “But if we don’t modify fares, some of us will look for other jobs.”

It’s not only drivers making dire predictions, though. Many farmers in Upper Egypt and the Delta have warned that agricultural production could fall as a result of the diesel increase, as they will be forced to pay more for both irrigation and transportation. “The government should encourage us to increase our production instead of introducing more impediments,” complained Abdou Hussein, a farmer from Kalioubiya. “I suspect they’ll regret the decision when – after a short time – they notice the shortage in agricultural produce.”

There is also fear that, gradually, the cost increase will trickle down to the average consumer, already frustrated by rising commodity costs since last year’s controlled currency flotation. Wafd MP Mounir Fakhri Abdel Nour told Business Monthly that the new move, while saving the state some £E 1.2 billion in the current fiscal year, would inevitably raise production costs, and that the prices of many products could be expected to increase further.

Mona el Baradei, professor of economics at Cairo University, agreed, saying the increase would serve to raise commodity prices, even of products not directly reliant on oil. “If there’s an increase in oil prices, this will lead to a chain of increases... that will affect the cost of living,” she said. “Any trader will feel the cost of living increase and will increase prices.”

Recognizing the potential for popular disturbances, the government announced shortly after the announcement that bakeries producing strategically vital baladi bread would be exempted from the decision and continue to receive their fuel quotas at £E 0.40 a liter.

 

Disasters smite productionat home and abroad Worries over climbing international oil prices worsened in early September, when Hurricane Ivan swept over a number of offshore drilling rigs in the Gulf of Mexico and past the oil-producing American states of Texas and Louisiana. According to Bloomberg News, offshore oil production in the Gulf was reduced by 83 percent as a consequence of the destruction wrought by the storm. The dizzying price rises, meanwhile, have focused attention on the need for alternative fuels. In Egypt, that means natural gas – a sector in which the country is aspiring to become a major player. But while Egypt’s natural gas production has increased rapidly, it can barely keep up with a growing demand that has made gas the primary energy source consumed domestically. Just as oil prices were escalating toward record highs in August, a drilling platform at Egypt’s biggest natural gas concession, the Temsah field, located 60 kilometers off the Mediterranean coast, caught fire and had to be shut down, making it that much harder to meet national energy demand. The blaze took days to extinguish, eventually enveloping the platform, jointly owned by Italy’s ENI, British Petroleum and the Egyptian General Petroleum Corporation. Damage was reportedly so extensive that the facility had to be scrapped, while the well may take six to eight months before it can again go online. Some industry insiders have said that, if the well can’t be reopened, new wells may have to be drilled nearby. The local natural gas market is already tight, and losing the 180 to 200 million cubic feet per day produced by the Temsah platform “really upset the apple cart,” according to one oil and gas industry executive. Other companies have reportedly stepped up gas production at their wells to compensate for the loss. While the cause of the fire remains unclear, some observers point out that the platform had been shut down earlier that month for maintenance.

Jill Carroll
and Ahmad Aboul Wafa

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