The drop in oil prices, as experienced globally, should see the oil producers in some panic. However, despite the reduction in export capacities, the leading petroleum states in the world have used that chance to focus on their growing domestic demand for petroleum products. Over the years, oil-producing countries in the Middle East have deliberately invested in energy intensive industrial sectors such as the petrochemical and aluminum production. The rationale behind such moves finds its basis in the fact that the citizens understand the region’s endowment with ubiquitous energy supply. The population increase in the area also plays a part in fostering the growth in domestic demand (Spindle 1).
Apparently, the enormous demand for petroleum domestically puts the oil prices at a risk of nudging back up with time since it reduces the export capacity of other countries. In the past four decades, all the member states of OPEC (Organization of Petroleum Exporting Countries) witnessed a tenfold increase in domestic demand for petroleum energy while demand in the rest of the world merely doubled. Mr. Steve Griffiths, Abu Dhabi’s Masdar Institute, executive director, says that the domestic consumption of petroleum energy is “out of control”. Every country in the entire Middle East has for a long time believed that access to cheap fuel is a fundamental right. The governments in the region are left trying to strike a balance between paying for imports and selling oil domestically at rock-bottom prices.
Most OPEC members know that that is not economically sustainable. Reducing the subsidies brings the risk of social backlash by unhappy citizens. As a result, the economics and strategic policy makers think that the global drop in oil prices create an optimal opportunity for reeling back the domestic price supports. The above is possible with or without immediate adjustments with regards what the domestic consumers end up paying. In light of this, the governments could embrace the opportunity brought about by the situation by designing policies for constructing secure social safety. In so doing, it will be possible to support the consumers even when the prices rise, without enacting across-the-board- subsidies.
Countries like Saudi Arabia are afraid of social backlashes. They are at the same time able to maintain their subsidies as well as cover for their loss of revenue from exports by tapping vast reserves. There is a lot of focus on improving efficient energy consumption as well as expanding their domestic energy consumption supplies.
Spindle, Bill. “Oil-Price Drop Offers Petro-States Chance to Curb Domestic Demand.” The Wall Street Journal (2015): Online.
Before you go, you are invited to support a noble cause on IndieGoGo: