Sep 14 2012
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Jordan: Rethinking petrol prices
The kingdom's current economic model is highly integrated with its ability to trade with its neighbours, a model that, thus far, appears to be working well. Despite less than favourable economic headwinds, the World Economic Forum's (WEF's) "Global Competiveness Report" for 2012-13, ranked Jordan 64th out of 144 countries surveyed, rising seven places over the previous year. However, the country's reliance on low petrol prices underscores the precarious nature of this ranking. In the longer term, developing a more local and sustainable form of oil, such as from shale, continues to remain a priority.
The issue of petrol prices and subsidies was brought starkly to the fore when King Abdullah II recently reversed a planned subsidy reduction that would have led to a fuel price increase, which the government had implemented without parliamentary approval at the end of August.
The announcement had led to uproar coming on the back of two previous increases earlier in the summer. If all three rises had taken place, fuel costs would have gone up by some 30%. However, despite the monarch's intervention, the urgent need to reduce fuel subsidies, which have a significant detrimental impact on the balance sheet, remains.
Other factors hinder the country's fuel supplies as well. The kingdom, which once subsisted on cheap oil imports from Iraq, has not been able to rely on that source for some time.
Sparked by these price increases, the government has needed to fill an increasingly widening gap in its budget, as subsidies continue to be a luxury the country can no longer afford. The Kingdom's public debt was calculated to exceed JD15.02bn ($21.14bn) in June 2012, a 12% increase on the previous year's figure of JD13.4bn ($18.86m), according to data from the Ministry of Finance.
While a great deal of external funding is coming into the Kingdom, including a $2bn package from the IMF, a $100m grant from the US government - in addition to $360m already received in annual US aid - and a $5bn grant from the GCC, much of this (especially the IMF funds, which are part of a "stand-by agreement") is accompanied by guidelines encouraging the kingdom to reduce its subsidies on a number of essentials, including petrol.
As a result, the government announced on August 31 that fuel prices would be rising across the country for the third time in three months. The increase amounted to a 10% hike in the price of 90-octane petrol, moving from JD0.70 ($0.99) per litre to JD0.77 ($1.08) per litre. 95-octane petrol saw a 1.5% price hike, putting its new price at JD1.15 ($1.62) per litre, while diesel fuel went from JD0.52 ($0.73) per litre to JD0.55 ($0.77) per litre.
"The Kingdom is going through a very sensitive and exceptional period that requires responsible decision making," Fayez Al Tarawneh, the country's prime minister, told The Jordan Times, regarding the decision. "No government in the world likes to increase prices, but national interests prompted the government to address the issue of [this petrol] subsidy."
The news was not received well, with a number of protests taking place across the country. Taxi drivers blockaded the main road in Amman, the kingdom's capital, while hundreds of activists gathered to picket the transport and industry ministries.
Two days following the government's announcement, King Abdullah II ordered Al Tarawneh to freeze the decision to raise fuel prices. On September 4, the Cabinet obeyed the royal directive, rescinding the decision to raise the price of 90-octane petrol and diesel.
At the time of writing, it was unclear if the increase on the more expensive and less common 95-octane petrol would also be rescinded. Al Tarawneh may now be facing a vote of no-confidence by the Kingdom's parliament, due to continuing public outcry against the decision.
However, while the crisis has subsided for the moment, it nevertheless points out a critical challenge facing the country's economy and its ability to trade - the high price of fuel. While subsidies continue to be a temporary solution, a more permanent one may be in the offering as international companies continue to invest in developing the kingdom's sizeable shale oil reserves.
The country is estimated to have more than 40bn tonnes of shale reserves, though some believe the figure may be closer to 100bn. Karak International Oil (KIO), a subsidiary of UK-based Jordan Energy and Mining Limited (JEML), is spearheading the largest part of the oil shale initiative. KIO estimates its investments in the project will total some $1.8bn, while JEML has already put in about $30m.
While the shale oil developments may take some time in coming, they potentially offer a more permanent solution to Jordan's petrol-pricing woes instead of continued subsidies. So long as foreign investment in this alternative source continues, Jordan's newly earned ranking of 64 in the WEF's global competiveness survey could be supplanted by even more impressive results in the future.
© Oxford Business Group 2012
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