Social instability and the price of energy

The optimism in many quarters over the wave of uprisings that began in late 2010 against authoritarian rule in many Middle East and North African countries has thus far failed to translate into positive developments in the region.

Syria remains mired in a vicious and bloody struggle between the ruling regime of President Assad and several opposition groups, some of which have links to al Qaeda and other extremist organisations.

The collapse of the Libyan regime of Colonel Gaddafi led to arms from his stockpiles flooding into other countries, exacerbating regional instability.

Mercenaries recruited by Gaddafi returned home with arms that have been used to take over vast swathes of northern Mali for example, with a majority of that country now under the rule of al Qaeda-backed Islamist extremists.

France is now leading a military intervention in Mali in an effort to return control of the country to the legitimate government.

There has been instability and protests of varying levels in most nations of the Middle East and North Africa which has created uncertainty about the future stability of governments in the oil-rich nations comprising the Gulf Cooperation Council – United Arab Emirates, Bahrain, Saudi Arabia, Oman, Qatar and Kuwait (GCC).

These nations are all ruled by royal families who have an informal social contract with their public that rests on the assumption that oil revenues will be used to provide services such as education, health, clean water, energy and the like, for either no cost or very low cost.

It is well known that prices for petrol in these nations are kept at low prices by international comparisons, but other forms of energy are also artificially reduced.

In Kuwait, for example, a decision was made in 1966 to reduce the tariff for electricity to the equivalent of about one Australian cent per kilowatt hour for residential users.

That price remains in force today, with industrial users paying half that rate at 0.5c/kWh.

By way of comparison, a 2012 report from the Energy Users Association of Australia revealed Australians were paying an average of 24.8c/kWh as at June 2011.

While this has brought some benefits to the residents of Arab countries, a recent United Nations report is highly critical of these widespread energy subsidies, claiming that it leads to misallocation of resources, overuse and waste of energy, very high growth rates in energy use and low investment in energy efficiency.

The report also finds that while low energy prices do operate as a welfare safety net, the vast majority of the benefits are captured by higher income households and industry.

Fuel subsidies have also resulted in many Arab countries having the most fuel inefficient transport networks in the world.

The UN report raises most concern about growing populations in the region and the long-term impact on government budgets of maintaining these subsidies.

It acknowledges that there is little likelihood of significant price rises for energy in the near future as rapidly rising fuel costs would also push up prices for food and other goods.

This would lead to increasing social unrest - something the Gulf States are desperate to avoid in the current climate of uprisings and civil wars.

Historically high oil prices have provided these governments with breathing space although the warning signs are there that reform must be undertaken at some point.

The International Monetary Fund has warned about rapid increases in government spending by Gulf States since 2010 and the depletion of foreign currency reserves by some states.

There is growing concern that a global recession triggered by the ongoing sovereign debt crisis in Europe, a slowdown in China or a failure of the US to reinvigorate its economy could bring sudden and sustained pressure on GCC governments.

This could in turn lead to social uprisings of the kind they have thus far avoided and that has serious implications for the world.

Energy markets have diversified, particularly on the back of the shale gas and oil revolution in the US, but any disruption to oil supplies from the GCC would send shockwaves through the world economy.

These governments may well be advised to begin carefully the process of energy reform before it is forced upon them at a time when fewer options are available.