Fuel prices’ liberalization remedy for budget deficit – KD 16 billion subsidies for next three years

oilKUWAIT: Local scene has been abuzz with much talk about forecast liberalization of prices of diverse types of fuel, particularly the benzene, amid predictions rates of the latter type may range between 100-115 fils per liter in the foreseeable future.

The sector’s stakeholders now view as a necessity liberalization of the fuel prices, considering the oil prices slump, where the barrel of crude has shed more than 70 percent of its value since June 2014, and oil income, upon which Kuwait depends as a main financial resource, declined by 95 percent.

The government allots annually some KD 6 billion worth of subsidies, including KD 4 billion in support of the petroleum products, thus liberalizing the energy prices and lifting the subsidies will avert hefty deficit. Such an approach has been recommended by the international consultancy, Ernest and Young, which has prepared a study on slashing the State support for the Ministry of Finance.

Considering the fact that the international fuel prices, particularly those of the bi-products, have been falling since 2014 causing drop of support for the sector; now is high time to free the prices; for citizens won’t suffer much from the wide prices’ margin.

In the United States, which does not subsidize the fuels, the benzene gallon rate dropped $2 (some KD 0.606), cheaper than a gallon of milk (priced at more than $3 or KD 0.910), according to Wall Street Journal.

By contrast in Kuwait, the need to take such a step currently appears very much necessary and adequate; where the Kuwaiti crude price is less than that of the US by $9.08, according to official statements publicized on December 23 — where the Kuwaiti crude price stood at $28.42 pb, compared to the American, $37.50.

Good opportunity
According to projections, the benzene cost in Kuwait will be, after liberalization, less than by 24 percent from that of the American. It is forecast to stand at some 115 fils per liter. In other words, now is the good and sound opportunity to take such a move; for in the future it may not exist.

According to official statements, State expenditures stand at KD 19.17 billion; income KD 12.2 billion, including KD 10.7 billion worth of oil proceeds (with the price set at $45 per barrel), at a daily output of 2.7 billion barrels.

According to the Ministry of Finance, actual deficit had amounted to KD two billion till December, forecasting that it will range in the fiscal yearend between five to six billion dinars. By some tentative calculations, the energy prices liberalization and securing the subsidy, KD four billion, may put the budget in a par status after slashing spending.

Undoubtedly, the State deficit, especially if it persists, will affect in the future Kuwait’s rating which stood at AA by Fitch in 2015 — along with forecast stability. The State yields dropped by 45 percent in 2015 first half, due to falling oil prices, while expenditure fell by 20 percent. The good rating may be undermined as a result of other factors; such as declining prices of the crude, and this in turn warrants urgent economic reforms to help diversify the income resources.

According to KUNA oil report, the national crude refineries currently refine some 920,000 barrels per day. Kuwait produces various types of derivatives such as naphtha, diesel and asphalt, in addition to gas bi-products.

Lowest prices
Kuwait currently is the third among Arab countries in terms of the lowest benzene prices, after Libya and Saudi Arabia, according to OAPEC. The Octane-91 is sold at 60 fils per liter, Octane-95 at 65 fils and Ultra-98 at 90 fils. After Saudi Arabia hiked the fuel prices, days ago, Kuwait became the first at the Gulf level and fourth internationally with respect of the cheapest fuel prices, after Venezuela, Libya and Algeria.

As to oil products’ consumption in Kuwait, according to an OPEC report, the country ranked sixth among Arab countries, posting 267,008 bpd, some 4.7 percent of the whole Arab consumption, standing at 5,723 bpd.

The consumption in Kuwait is high considering the population volume — 4.1 million souls-according to the International Monetary Fund, some 1.2 percent of the whole Arab nation estimated at 348 million in 2015. Petroleum consumption per capita in Kuwait is estimated at 24.4 barrels per year, four times higher than the average yearly consumption in Arab countries, estimated at six barrels.

Fuel sales in the Kuwaiti domestic market is estimated at 5416 million liters per annum, including 3748,4 million liters (four types of benzene), some 76.2 million liters (kerosene) and 1592 million (oil gas).

Sales of fuel for the Ministry of Electricity amounted to 8094 million liters, sales of gas oil some 1765 million liters, heavy fuel oil 6329 million liters, bitumen 167,000 tons per year-therefore the overall sales of fuel to the local market and the ministry reached some 13510 million liters. Per capita share of the government subsidy in Kuwait amounted to $3,430 per annum, according to the IMF (2015).

Budget deficit
Meanwhile, Undersecretary of Kuwait’s Finance Ministry Khalifa Hamada said that the expected financial subsidy by the State for citizens is projected at KD 16 billion during the next three years, in case the subsidy system remained unchanged.

Khalifa added in an interview with Al-Qabas Arabic-language daily published yesterday that the continuation of the subsidy system will contribute to increasing the expenditure which will lead to an imminent budget deficit. He said that the government plan to rationalize subsidization will contribute to saving KD 2.6 billion in three years, which shows the importance of the plan in a time when the budget is witnessing a large deficit because of falling oil prices.

He pointed out that the rationalization process will ensure the sustainability of development in Kuwait and give the State the ability to continue to provide essential services to its citizens, such as education, health, security, justice and other services that are indispensable. – KUNA

This article was published on 30/12/2015