Lower Oil Price “Double-Edged Sword” for Energy-Hungry Egypt

The fall in global oil prices will cut Egypt’s fuel subsidy bill but could hit the finances of oil-exporting Gulf allies who have showered it with billions of dollars in aid.

Oil has dropped dramatically over the past six months, with Brent crude trading at $60.87 a barrel on Tuesday, down 47 percent from this year’s peak just over $115 in June.

If it stays at that level, the government expects to save 30 billion Egyptian pounds($4.2 billion) on fuel subsidies for its 86 million people in the 2014-15 fiscal year. But that is less than half the total Gulf aid it received in the last fiscal year alone.

“This is a double-edged sword,” said Justin Dargin, a Middle East energy expert at the Oxford Institute for Energy Studies.

“If oil prices remain low, it is likely that its Gulf patrons will be forced to reduce some of their funding.”

Turmoil sparked by the 2011 uprising that overthrew veteran leader Hosni Mubarak has battered Egypt’s economy. But Gulf oil exporters have thrown their weight behind Abdel Fattah al-Sisi, the ex-army chief who orchestrated the overthrow of elected Islamist president Mohamed Morsi in July 2013 and since then has sought to crush his Muslim Brotherhood.

Saudi Arabia and the United Arab Emirates consider Egypt a strategic ally in the fight against the Brotherhood, which they see as a threat to their own ruling orders.

Cash and oil products worth $10.6 billion arrived from the Gulf in 2013-14, bolstering the economy and giving Cairo space to reform the subsidy system that had turned it from energy exporter into net importer in recent years.

Gulf allies are also set to play an important role at an international conference in March, where Egypt hopes to attract billions of dollars in investment.

Ashish Khanna, lead energy specialist at the World Bank in Cairo, said Egypt stood to benefit overall from oil’s decline and would save upwards of 20 billion pounds even if prices nudge back closer to $80.

“Falling oil prices positively impact fuel-importing countries like Egypt, in terms of lowering the subsidy burden… and improving the available fiscal space for public investments or enhanced social spending,” he said.

Though global prices are now hovering near five-year lows, analysts say they would have to fall further for longer before Gulf countries cut aid.

“The sums provided to Egypt so far are relatively small when compared with the Gulf’s savings, so things would probably have to get a lot worse before they cut aid,” said William Jackson, economist at Capital Economics in London.

Source: Reuters