As oil-exporting countries struggle to respond to the crisis, there is a way to make critical fiscal resources availableby Mario Pezzini and Håvard Halland / June 4, 2020 / Leave a comment
The Covid-19 pandemic has hit oil-exporting countries at the worst possible moment. Severely strained health systems, and the need for economic stimulus, call for unprecedented growth in public spending. At the same time, oil export revenues have plummeted, following the demand collapse caused by the pandemic and a breakdown of traditional price-setting mechanisms. As a result, many oil exporters in the low- and middle-income category will struggle to muster anything near the level of expenditure required for an efficient response to the virus.
In the most oil-dependent countries, oil exports account for 60 per cent or more of fiscal revenue—in some cases above 90 per cent. Assuming an average oil price of $30 per barrel, these revenues could by International Energy Agency estimates fall by as much as 50 to 85 per cent in 2020. To make matters worse, several oil-exporting countries are already fiscally constrained, with debt levels higher than they were ahead of the 2008 financial crisis and indebted national oil companies.
A number of oil-exporting countries subsidise the production and consumption of petroleum products. Commonly, governments require their national oil companies (NOCs) to sell refined petroleum products to domestic consumers at subsidised prices that are well below global market prices. NOCs and their governments thereby forego of much of the revenue that exporting the crude would have brought in global markets. Fossil fuel subsidies deprive governments of revenues that are now essential to fighting the Covid-19 pandemic. At the same time, these subsidies encourage wasteful domestic fossil fuel consumption, and lead to increased emissions of greenhouse gases and air pollution.
While fossil fuel subsidies are prevalent in countries at all income levels, middle-income oil exporters have the highest subsidies as a share of GDP. These subsidies can be as high as 2 to 10 per cent, and in some countries reach 15 per cent and above. After declining for several years, subsidies have been increasing again, to about $340bn per year according to joint OECD and IEA estimates.
Although governments may have intended subsidies to make energy more affordable to the poor, they are in practice often inefficiently targeted and disproportionally benefit wealthier groups. Nonetheless, fossil fuel subsidies have proved remarkably hard to get rid of, partly for political reasons. Influential groups frequently exercise pressure on governments to retain the subsidies. Furthermore, the access to cheap fuel can be part of governments’…