Five Minutes With: Mustafa Ansari, analyst, energy research, APICORP
For decades, the provision of cheap energy has been a main pillar of the GCC development strategy aimed at achieving key economic, social and political objectives.
What are the reasons behind the slowdown in the GCC fuel consumption?
The two most important factors influencing demand in the GCC as a whole are GDP growth rates and cost of fuel. Therefore, energy reforms impact retail prices. Diesel tends to be driven more by economic activity as opposed to gasoline, which is why it shrunk by 6% in 2016 compared with an average of 4% growth during 2010-2015. For gasoline, however, demand also shrunk in 2016, but by 0.4%. Consumers switched from higher-grade gasoline to lower grade gasoline, to offset the increase in prices following subsidy reforms.
How has the global crude price impacted the fuel consumption in the GCC?
Global crude prices have affected fuel consumption in two ways. The GCC is an exporter of crude oil and thus relies significantly on its sale to generate government revenue. In the past three years, low oil prices have reduced government revenues and therefore led to tightened government budgets. Furthermore, it led to a slowdown in economic activity with GDP growth in 2016 lower than historical trends. This slowdown, has negatively affected demand for crude products. But in the UAE, due to liberalised prices (retail prices each month are determined based on international prices) and with a further slump in oil prices in 2016, domestic retail prices were relatively low, which led to higher demand for both gasoline and diesel.
Why did the demand for gasoline and diesel increase in the UAE in 2016 compared to the year before?
The fuel prices in the UAE, pre-liberalisation, were already higher than their GCC peers. When prices were liberalised and with the continued slump in oil prices, the initial impact on gasoline was negligible as prices were already close to international levels.
For diesel, however, the situation is different – a prolonged trend of price cuts continued into 2016, with prices dropping to their lowest level in July. This contributed to an increase in demand for both products. Gasoline prices went from an average of $0.48 in 2015 to as low as $0.36 in March 2016, as international prices dipped below $30/b in the beginning of 2016.
What would be the impact of the slowdown in the GCC fuel consumption on the region’s Economy?
Energy consumption is certainly important for growth. For decades, the provision of cheap energy has been a main pillar of the GCC development strategy aimed at achieving key economic, social and political objectives. Low energy prices have enabled the GCC to achieve some of these objectives. Certainly, for industry, it may lead to lower output levels, lower utilisation rates, lower demand for skilled labour and higher costs.
Nevertheless, there is a bright spot amidst the gloom. Lower fuel consumption will help regional governments save millions whilst also freeing up more products for exports. Rapid demand growth in the past meant that the level of investment required to keep pace became unsustainable. Lower domestic demand levels will ensure that the region can maintain its position as a leading energy exporter, whilst simultaneously working towards economic diversification to reduce dependence on export revenues. But, as the regional economies enter the recovery phase, we are set to see some of this demand growth gradually return.
How do you foresee the demand for gasoline and diesel in the GCC in the next one year?
Demand for diesel and gasoline is driven primarily by economic activity and the price for retail fuel. The IMF predicts that economic growth will decline in 2017, compared with 2016; so, the demand outlook is on the downside. As these economies recover and in the absence of any further policy reform, we will begin to see a recovery in some of the lost demand.
Nevertheless, demand for the fuels may contract further if the remainder of the GCC continues with their energy reform plans. In the UAE, retail prices will be driven primarily by changes in international prices. Saudi Arabia has signalled that energy price reforms will progress in line with economic activity, and as we see a recovery in growth, the likelihood of further price reforms will also increase.