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Egyptian production struggling with domestic demand

Energy production is not keeping up with soaring domestic demand, damaging the economy in the country that launched the Arab uprisings

The popular revolt that led to the downfall in 2011 of Egypt's President Hosni Mubarak marked the earliest and most significant chapter of the Arab Uprisings. Not only is Egypt the most populous and economically diverse Arab country, but it lays a reasonable claim to being at the metaphysical and geographical heart of the Arab world, situated at the crossroads between Arabic-speaking North Africa, the Levant and the Gulf. Egypt, one can say, provides a template for understanding the political tsunami engulfing countries elsewhere in the Middle East and North Africa (Mena) region.

But Egypt's political evolution has proven more complex than the swift demise of the Mubarak regime would suggest. The political standoff between the Muslim Brotherhood government and a weak and uncoordinated secular opposition allied to Salafists has perplexed political scientists. But it has been the absence of a new vision for the country that has been striking, alongside a vacuum of policy-making in the past two years.

Energy policy now lies at the heart of some of the greatest hurdles facing the Muslim Brotherhood government of President Mohammed Morsi. Egypt's glory days as a regional oil exporter ended in 2007 when falling production and rising domestic demand meant the country became a net importer of oil. The failure to address energy subsidies, which are now costing the treasury $13 billion annually for diesel alone, has driven strong growth in demand for oil products. Egyptian consumers are now facing severe shortfalls in diesel supply: a full fifth of overall demand may be lacking, according to Petroleum Policy Intelligence (PPI).

The collapse in supplies of diesel and liquid petroleum gas (LPG), which is used in domestic cooking, has led to a burgeoning black market and disruption to bread deliveries and agricultural production, a crucial economic segment for the vast majority of Egyptians outside the main urban centres. It has also hit tourism, one of the main foreign currency earners. Long queues outside petrol stations are now a permanent feature of the Egyptian landscape, while protests against shortages are increasingly turning violent, as frustrated drivers block roads.

As with Jordan, the IMF has insisted on energy subsidy reform as a prerequisite for releasing a $4.8 billion loan that has become critical to keeping Egypt afloat. But fearing a voter backlash, the government has delayed the implementation of a ration smartcard system designed to ease shortages and is now not expected to implement the plan before delayed parliamentary elections in October. Prices remain dirt cheap. Diesel retails in Egypt at $0.19  per litre and LPG bottles sell for $0.70 though PPI calculates they cost the government $10.

A series of crisis

While government ministers appear politically unwilling or technically incapable of implementing policy measures to deal with Egypt's worsening economic and public finance crisis, senior government figures have made approaches to Iraq and Libya for the supply of oil to the country on soft terms.

These deals were trumpeted to the public as a success for Muslim Brotherhood diplomacy but are unlikely to be implemented due to the considerable and rising political pressures in both Iraq and Libya. Neither country is really in a position to be doling out cheap energy to Egypt. If Egypt's handling of its domestic fuel supply and distribution is sclerotic, the country's natural gas sector is catastrophic. Only 10 years ago, Cairo laid the groundwork for a two-project liquefied natural gas (LNG) sector; pipeline exports to Israel and the Arab Levant; big investments in household gas networks in urban areas; compressed natural gas for buses and taxis, and a raft of gas-intensive downstream industries.

Cairo's allocation of a third of its gas reserves to export, a third to domestic markets and a third to future generations - a strategy famously espoused by the Mubarak-era energy minister, Sameh Fahmy - proved aspirational at best, however, with demand from industry and the power sector running at an unsustainable 7% annually. Eventually, this forced the government to abandon its strategic division of reserves and, more recently, to call time on LNG exports and issue a tender for LNG imports. Despite rising output, the trajectory of natural gas production, which has hit a plateau, versus local demand has been almost as worrying as that for oil (see Figure 1).

Figure 1: Egyptian oil and gas

Of course, none of this reflects the shortcomings of the post-Mubarak government itself but rather the long-term systemic trends that were already challenging policy-makers. Egypt's lack of a long-term plan for gas use, combined with exploration terms that had failed to attract major international oil companies and deliver the drill-bit success seen in the 1990s, when a string of discoveries prompted the country's domestic dash for gas, are all part of the problem.

The way out of the crisis will require a comprehensive economic plan that addresses the need for economic growth, the budget deficit (forecast by the government to reach $28.75bn, or 11.5% of GDP, this year) and the weak currency, which has lost about 20% of its value against the dollar since Mubarak's ouster.

Yet, so far, the government's approach to fiscal and energy deficits has been simply to approach Gulf countries and major oil exporters with the begging bowl. While this may work in the short term - Qatar, for example, has agreed to supply some LNG to Egypt and pledged to send five free cargoes this summer - longer term solutions will have to be structural.

In the energy sector, this will mean a wholesale revamping of the upstream sector, including a more business-friendly and flexible upstream regime that encourages new entrants both onshore and offshore and rewards existing partners by showing flexibility on terms for redevelopment of mature oilfields.

In terms of domestic energy, the only way to moderate demand will be through price reforms. These will be politically unpalatable, but if coupled with other measures that ensure welfare and cushion some of the impact on the poorest consumers, should be possible as part of a broader economic development plan. 

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