x Abu Dhabi, UAEWednesday 13 December 2017

Fuel consumption falls across the region

Reforms to fuel pricing in GCC states have contributed to decline, says BMI report

A petrol station in Riyadh, Saudi Arabia. The kingdom, along with most other GCC states, has cut fuel subsidies. Faisal Al Nasser/Reuters
A petrol station in Riyadh, Saudi Arabia. The kingdom, along with most other GCC states, has cut fuel subsidies. Faisal Al Nasser/Reuters

Subsidy reforms and weaker economic growth in the region, impacted by low oil prices, have led to a fall in fuel consumption in 2016 and 2017, according to a report by the macroeconomic firm BMI Research.

“Demand has been slower to normalise than we had initially anticipated, in part due to the pace and depth of subsidy reforms,” said the report.

Growth is expected to pick up in 2018 as economies gains strength in the region.

“From 2018, we forecast a normalisation of demand supported by a pick-up in economic activity in the region. However, the pace of growth will remain subdued, dragged down by ongoing energy reforms and, to a lesser extent, continued switching from oil to gas,” BMI added.

Following the fall in oil prices from US$100-plus highs in early 2014 to half the level towards the beginning of the following year, regional economies have undertaken much-needed subsidy reforms.

In 2015, the UAE slashed petroleum subsidies that the IMF estimated had cost its economy around $7 billion annually.

The Opec-producer also linked petrol and other fuel prices to match global standards and has since updated pricing on a monthly-basis.

Following enforcement of reforms, energy price subsidies have shrunk to 0.7 per cent of the gross domestic product (GDP) in 2016 from 2 per cent in 2013, according to the latest statistics from the IMF.

In 2015, the region’s largest producer Saudi Arabia, which had been hesitant to undertake fuel subsidy reform, increased pricing of higher-grade petrol by 50 per cent and also allowed for increases in regular petrol as well as diesel.

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Oman also increased fuel prices by 10 per cent to $0.42 per litre in 2016 and has since made monthly adjustments.

Bahrain increased prices of regular petrol by 56 per cent and premium-grade fuel by 60 per cent. Kuwait has remained the only GCC country to still hold on to subsidies, bowing to pressures of populist politics. In 2016, the government’s proposal to hike fuel prices by 70 per cent led to protests from the Kuwaiti cabinet, which eventually led to the parliament being dissolved and fresh elections being announced. Energy price subsidies accounted for 6.8 per cent of the Kuwaiti GDP in 2016 - the highest in the Middle East - according to the IMF.

The BMI report added that diesel had been the most exposed to the downturn, particularly in Saudi Arabia, the region’s largest consumer of the fuel. Deeper enforcement of fuel subsidy cuts as well as the start-up of the Wasit gas plant in Jubail to meet demand for power generation had resulted in the slowly increasing displacement of oil with natural gas in the power sector.

Petrol consumption in the kingdom remained less impacted thanks to lack of public transport alternatives, while demand for the same had been quick to normalise in Oman.

The London-based consultancy Facts Global Energy said in an earlier note that demand for petrol will pick up in Saudi Arabia next year following the royal decree issued in September allowing women to drive.

However, it cautioned against over-anticipation as Saudi Arabia is expected to introduce an 80 per cent hike in petrol prices, which could dampen consumption.