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The good, the bad and the ugly effects of dwindling oil prices on Jordan

By Omar Obeidat , Dana Al Emam - Dec 14,2015 - Last updated at Dec 15,2015

Falling oil prices are good news in the short run, but might have negative effects if the downtrend continues (Photo by Hassan Tamimi)

AMMAN – Crashing oil prices to levels last seen during the global financial crisis are likely to have a good, bad and even ugly impact on Jordan's economy, economists and energy experts told The Jordan Times Monday. 

The experts said the plunging oil price, which reached $35 a barrel Monday, is good news for Jordanian consumers and some businesses, however if prices remain low in the coming few years, this may bring a significant downside for the Kingdom's economy. 

 

The good 

 

Former energy minister, Malek Kabariti, said falling oil prices are good for Jordan's economy as a whole, as they mean a slimmer energy bill, the heaviest burden on the economy.  

The cost of energy incurred by the Kingdom, which imports nearly 96 per cent of its energy needs, declined during the first three quarters of this year by nearly a half to JD1.7 billion from JD3.3 billion in the same period of 2014, the Department of Statistics has announced recently. 

The government is still subsidising electricity and the fall in crude oil would save the treasury millions of dinars in reduced subsidy costs, the former minister said, adding that the production power generation cost of the heavily indebted National Electric Power Company (NEPCO), a state-owned entity, has dropped sharply over the past months. 

NEPCO debts are estimated at JD5 billion due to losses the company encountered over the past five years, blamed mainly on the disruption of gas supplies from Egypt. 

Economist Mufleh Akel said Jordanian consumers are the biggest beneficiaries from the drop in oil prices. 

“Consumers are very happy to see oil prices hit low levels due to the decreasing spending on energy purchases,” he said. 

Akel said cheap oil prices are also a relief for the producers and industrialists who rely on fuel in their production, adding that lower production costs would enable Jordanian producers to better compete in the domestic and regional markets. 

Economic analyst and columnist at Al Rai daily Issam Qadamani echoed the views of the Kabariti and Akel, noting in addition to decreasing Jordan’s energy bill and reducing the trade balance deficit, lower oil prices allow families to use the difference in prices of fuel products for other purchases or for saving.

 

The bad 

 

Crashing oil prices may be bad news for the government’s domestic revenues as fuel products carry a tax rate of nearly 40 per cent, the experts noted. 

State revenues from fuel products dropped by JD150 million this year, Minister of State for Media Affairs and Communications and Government Spokesperson Mohammad Momani said last month when the government revealed its spending bill for next year. 

To offset the drop in revenues, experts made a number of suggestions. 

Akel said instead of imposing a tax rate on fuel products, the government can charge a fixed amount per unit of fuel to make up for the drop in revenues. 

Qadamani urged the government to encourage investments in industrial and commercial projects that can create jobs to further boost economic productivity and thus enhance the Treasury’s income.

Akel also indicated that the economic growth target for next year, put at 3.7 per cent, may not be achieved due to shocks from low oil prices that could affect government revenues and may affect remittances of Jordanian expatriates. 

 

The ugly 

 

The worst scenario of plummeting oil prices on Jordan is the  possible impact of side effects on expatriates and remittances, the experts said. 

Akel said that Saudi Arabia, the world’s largest oil producer and exporter, could see financing strains due to lower revenues if the downtrend in oil prices continues for the coming two to three years.

He explained that the construction sector in the Gulf kingdom is likely to witness a severe slowdown because the government might get pushed to suspend some projects there. 

There is a considerable number of Jordanian professionals, particularly engineers, who work in private construction companies in Saudi Arabia, he said, adding that construction firms in the neighbouring Kingdom may lay off some of their employees or cut their salaries. 

Jordanian companies doing business with or in Saudi Arabia are likely to feel the pressure the Gulf state is facing due to dwindling oil prices, the economist said. 

Official figures estimate the number of Jordanians in Saudi Arabia at around 300,000, mostly professionals and skilled labourers.  Nearly 200,000 Jordanians are based in the United Arab Emirates, another major world oil exporter. 

Falling oil prices may have a toll on expats’ remittances, the pundit said. 

Remittances reached over $3.66 billion (JD2.6 billion) last year, or 10 per cent of Jordan’s gross domestic product, according to official data. 

Oil and energy expert Mazen Irsheid said that such an effect on Saudi Arabia and other Gulf countries can be seen if the current low oil prices stay the same or further drop for four to six years to come, a matter he said is “unlikely”.

 He said the Saudi sovereign wealth fund contains $700 billion, $75 billion of which was spent since June this year, kicking off a depletion process of Saudi reserves. 

Irsheid cited International Monetary Fund expectations for the funds reserves to run out completely in five years’ time in light of current spending patterns.

Oil is the source of over 90 per cent of Saudi Arabia’s income, he said, expecting layoffs of guest workers, including Jordanians, to occur in three years if oil prices remain around $40 a barrel.  

Kabariti called on decision makers not to repeat the same mistakes when oil prices fall by ignoring strategic projects that can make Jordan an energy independent country. 

 

“We should continue to focus on renewable energy because it is the future of Jordan and it is the way to success,” the former minister said, indicating that Jordan is now a regional leader in terms of adopting environment-friendly energy schemes.

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Comments

We live in a strange world. We complain when oil prices are high and complain again when they are low. How could it be bad if the government expenditure on oil imports has dropped by 50% in less than one year? And, if consumers are the greatest beneficiaries, isn't that a good thing? It seems we lack robust, long-term strategies for different kinds of economic scenarios. An astute government would know how to take advantage of this huge fall in oil prices and would be prepared if they rose up again.

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