Fuel Subsidy End Risks Downward Consumption Move

BMI View : The ending of fuel subsidies in Libya could see lower growth in oil demand as higher prices reduce consumption. While this could bring about a relief to the state's coffers, it could also be a difficult policy to implement given Libya's political frailty. Hence, we have yet to incorporate its possible impact in our consumption forecasts until greater clarity on the issue is made.

Libya Oil Minister Abdelbari al-Arusi disclosed in an interview that the country is seeking to end fuel subsidies in three years, in a move that mirrors similar efforts by other North African countries such as Egypt and Tunisia. This will apply to all classes of fuels, including diesel and gasoline. By doing so, Libya hopes to end fuel smuggling to neighbouring countries, as opportunists seek to maximise their returns by selling cheap fuels obtained in Libya to countries where fuel supplies are scarce for a higher price.

Ineffective Measures

Propped up by revenues from the sale of oil and gas, Libyan state coffers have been less crippled by costly fuel subsidies than neighbours such as Egypt and Tunisia. According to the International Energy Agency (IEA), fuel subsidies made up about US$3bn or about 8.5% of GDP, compared to the US$17.4bn bill raked up by Egypt in FY2012.

Nonetheless, the IMF's latest mission report on Libya, released in April 2013, warned that the high level of subsidies risk s building an 'entitlement mentality' within the country. This could be particularly dangerous if the collapse of oil and gas prices - which make up about of 95% of state revenue - limits the state's ability to continue these subsidies and in turn, risk s igniting public unrest at higher prices. T he exacerbation of Libya's continued political instability as a result of discontent over higher fuel prices could have a detrimental impact on long-term growth.

Subsidies Diversion
Government Spending For FY2013

Weak long-term growth prospects for Libya's upstream segment also threaten to limit revenue streams from this source to the government and continue to support fuel subsidies, particularly as consumption rises. Rocked by militia disruptions to upstream activity, Oil Minister al-Arusi disclosed to the Financial Times that the country has lost US$1bn in five months from such outages.

Security risks, both domestic and regional, have already seen a number of major players practise caution in stepping up activity in the country ( see our online service, April 8 2013, 'Protests, Clashes Underscore Forecast For Limited Gains'). If this continues to impede additional exploration in the country, the lack of new commercial oil and gas discoveries in the short term will hit its medium-term and long-term production potential. In our 10-year forecast period to 2022, we expect growth to plateau for this very reason.

Without a corresponding cut to fuel subsidies to raise prices at the pump, it could artificially push up Libyan oil consumption. Prior to al-Arusi's proposal to cut fuel subsidies, we had expected oil demand growth to average about 4.6% per annum between 2013 and 2022, which far outstrips the 1.46% average annual increase we forecast for oil production.

Falling Behind
% Year-on-Year Change In Libyan Oil Production* & Oil Consumption

Will It Go Through?

If Libya proceeds to cut fuel subsidies, it will pose a downside risk to our current forecast for the country's oil consumption as we expect price hikes to reduce oil demand. However, this could prove a difficult enterprise. Libya has one of the lowest gasoline pump prices in the world. According to the World Bank, gasoline is sold at about US$0.12 per litre at the pump - lower than even highly subsidised Kuwait and Saudi Arabia. The elimination of subsidies could see more than a ten-fold increase in pump prices that is not likely to sit well with the public. Until the specifics of this policy are available, we are holding off incorporating the effect of ending fuel subsidies on our forecast for Libya's oil consumption.

Below The Rest
Comparison Of Gasoline Prices At The Pump (US$/litre)
This article is tagged to:
Sector: Country Risk, Oil & Gas
Geography: Libya

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