The recent drop in oil prices is a once-in-a-decade opportunity for the developing world to reform its economic structure for the betterment of its people. The lower cost in global fuel prices can provide a unique avenue for countries to carry out energy subsidy reforms and develop energy efficiency programs with a much smaller negative effects on the population than otherwise.
But why should we act now? Well, globally the Middle East and North Africa (MENA) region is now the second most energy-intensive region in the world, after Eastern Europe and Central Asia, and attributes to 6% of the world’s energy-related Greenhouse Gas (GHG) emissions (2005). On average its energy intensity is now 60% higher than that of OECD countries and 40% above the world’s average. The environmental, economic and societal costs of non-action have already started to considerably affect the region’s inhabitants. The health costs attributed to the considerable local air pollution is estimated at close to $5.3 billion, an equivalent to 1% of gross national income in 2004 or 40,440 premature deaths per year. In comparison to global averages the local emissions are almost 50% higher in MENA urban areas than the world average. This is mainly due to the burning of fossil fuels for electricity generation, transportation, and manufacturing.
In the past subsidies on food and fuel were intended as a means for sharing the region’s oil wealth with its citizens and seen as part of the ‘social contract” without any regards for the effects on local air pollution. However, generalized subsidies are neither well targeted nor cost-effective as a social protection tool and have failed to reach those who need them most and instead mostly benefit the well-off who consume more subsidized energy.
Taking the example of Egypt in 2008, the wealthiest 20% of the population received 93% of gasoline subsidies, as they owned most of the vehicles, while the poorest 40% received 3%. Likewise in Yemen, the richest 10% of households received 40% of all subsidized diesel, while the poorest 2% received only 2%. While energy subsidies are not only inefﬁcient in supporting the poor they also account for a considerable share of the region’s public financing, averaging in excess of 20% of state budget across MENA countries and over 7% of GDP in 2006 well before the last round of 2008 global oil price spikes.
The time for change is now and governments must take advantage of low oil prices to introduce policies which index domestic energy tariffs to global oil prices. In order to ensure a smooth transition, social assistance programs for poor and vulnerable consumers must be bolstered while national communications strategies which raise awareness and build support for subsidy reforms must be implemented now. This would ensure that energy tariffs adjust automatically when oil prices recover, and that governments are prepared to provide the appropriate assistance immediately, rather than face political pressure to re-introduce price subsidies. The 2014 decision of the Egyptian government to phase out fossil fuel subsidies is a good example of another country, just like Tunisia in 2012, of taking a step in the right direction.
However, if energy products remain underpriced and governments fail to take action now consumers will have fewer incentives to be efficient with their energy use and will be tempted to use it for purposes that produce relatively little value and continue to decrease the value of national economic output. MENA governments owe it to their people to avoid the temptation of passing lower oil prices directly on to consumers for the sake of short-term stability, and should take this timely opportunity to wean their countries off subsidies.