In April 2020, global oil prices plummeted to a low of $18.3 per barrel, the lowest price since June 1999 when the average was set at $15.8 per barrel. Reduced oil prices should work in favor of the economy in Egypt, a net oil importer. However, the decline in oil prices affects the Egyptian economy in other ways, as explained here.
First: The balance of oil in Egypt
Egypt is a net importer of oil. Even though it imports much of its needs oil, it exports quantities from its domestic production. Domestic oil production has reached 539,000 barrels per day in fiscal year 2018/2019, down from 542,000 barrels a day a year earlier.
Egypt’s natural gas production increased at record rates, reaching 6.4 billion cubic feet in 2018/2019, up from 5.2 billion cubic feet the year before. The figure shows the development of oil production from different petroleum products:
Figure 1 – Petroleum products in 2013/2014 – 2018/2019 (daily)
The figure shows that with the exception of oil, Egypt’s production has grown, especially of natural gas in the past three years. Foreign companies operating in the sector increased their investments, after they obtained their arrears from the Egyptian government, either for the purpose of developing the existing fields and facilities, or exploring and discovering more fields. However, this growth did not change Egypt’s position as a net importer of oil due to the large domestic demand for energy products in general, which creates a consumption gap illustrated by the following figure for both oil and natural gas:
Figure 2 – The evolution of the consumption gap of oil and natural gas in 2010-2019
The figure shows the continued existence of a gap in oil consumption, which amounted to 53,000 barrels per day in 2019 on average, while the deficit in natural gas consumption, which reached nine billion cubic meters in 2017, turned into a surplus in 2019 by about four billion cubic feet. This surplus is limited, compared to what was achieved in the first decade of the century, reaching in 2010 about 15 billion cubic meters that were destined for export. Therefore, Egypt’s oil trade balance remains in a state of deficit, which is illustrated by the following figure:
The figure shows that Egypt has turned into a net importer of oil in 2012, achieving a surplus in 2010 of $1.27 billion, which decreased in 2011 to $0.65 billion, and then turned into a deficit in 2012 of $4.6 billion, under the pressure of the decline in the domestic production of gas and the rising global prices. Oil prices reached their highest annual averages ever of $111.63 per barrel of Brent, and this deficit reached its peak in 2015 at an average of approximately $7.5 billion. Then, a gradual decline began, reaching in 2019 about $4 billion. During the past 10 years and until May 2020 this deficit cost the country about $32.1 billion.
During the first five months of every year between 2010 and 2020, the value of national oil exports decreased to the lowest level in 10 years to $0.95 billion as a result of lowered prices. These exported quantities are lower than the average exports for the same period in 2010-2020, and the value of imports came close to their lowest levels ever at $2.79 billion, and thus came below the average in the same period at $3.47 billion. This is what created a deficit in that period that amounted to approximately $1.84 billion. The following figure shows the series of oil exports and imports in the first five months during the study period:
Figure 3 – The value of oil exports and imports in Egypt during the first five months of every year between 2010 and 2020
|Oil Exports||Oil Imports||Deficit|
|The first five months of 2020||0.95||2.79||-1.84|
|The average value||2.38||3.77||-1.02|
|The highest value||3.90||5.57||1.00|
|The lowest value||0.95||2.26||-2.85|
Despite the decrease in oil prices, the effect on the volume of Egyptian imports was not positive compared to the same period of the previous 10 years. This may be partly due to the Egyptian authorities’ tendency to accumulate quantities of oil and raise the strategic stockpiles when prices decrease, which caused an increase in imported quantities during the first five months of the year compared to the same period of past years. This cannot be confirmed at the present time, as there is no public census on the imported quantities or the size of the Egyptian oil stockpiles.
Second: The effect on Egypt’s state budget
To alleviate the economic burden on the general public, the state subsidizes oil products as part of the state budget’s Chapter IV concerning subsidies, grants and social benefits. The economic reform program Egypt embarked on in 2016/2017 to deliver subsidies to those who deserve them, particularly in food items and social solidarity pensions, affected the allocations of oil subsidies in the state budget.
Figure 4 – Allocations of oil subsidies in the state budget in 2009/2010-2020/2021
The figure shows allocations for oil subsidies declined from their peak in fiscal year 2013/2014 at EGP 126 billion to their lowest in 2020/2021 at EGP 28 billion, or about a fifth of the sum less than six years earlier. Oil allocations in the state budget’s subsidies decreased from their peak in fiscal year 2009/2010 at 65 percent to their lowest of seven percent in the current fiscal year. The total of these decreases leads to a reduction in the burden of subsidizing petroleum products on the state, which reduces the levels of spending on this item and reduces the budget deficit. This trend is reinforced by a decrease in the price of oil, as the first five months of 2020 were received in the second half of the fiscal year 2019/2020 budget, during which the general budget had expected oil to reach $68 per barrel, as the following figure shows:
Figure 5 – The difference between the budget estimates for the price of oil barrel, and the actual price.
The figure shows that the actual price of the average months of the fiscal year 2019/2020 was $51.3 per barrel, down $16.7 per barrel. If Egypt suffered from a deficit of 53,000 barrels of oil per day in 2019, and assuming that the same figure applies to the fiscal year, the savings resulting from the decrease in the price amount to $323.06 million, or the equivalent of EGP 5.16 billion at the exchange rate of EGP 16 per dollar. In July and August 2020/2021, the average price of oil was set at $44 a barrel, down $17 from the state budget forecast of $61, which makes the savings, according to the same previous estimate, amount to $54 million, or EGP 864.9 million.
Third: Indirect influential factors
Oil affects the Egyptian economy through indirect factors, the most important of which is the Suez Canal. It is assumed that the low price of oil leads to international shipping companies replacing the Suez Canal by the Cape of Good Hope, so that the value of the transit fees during it is replaced by consuming more oil at a lower price, which reduces the canal’s revenues in general. This effect has appeared since May 2020, when revenues began to decline from $476 million in April to $444 million. In June Suez Canal revenues registered $406 million, which is the lowest monthly income achieved by the canal since February 2017, when its revenues reached only $375.8 million, as the following figure shows:
Figure (6): The impact of low oil prices on Suez Canal revenues
It is worth noting that this effect is related to the pressure of the coronavirus on global trade, which resulted in its contraction as a result of the closure of a large number of factories because of the lockdown and the implementation of the rules of social distancing, which is the same effect that resulted in the decline of oil prices in the first place.
Among the most important indirect factors are the economic pressures that the coronavirus imposed on the economies of the Gulf countries, where a large number of Egyptians work. Remittances are the second most important source of foreign currency flows to the Egyptian economy. The economies of the Gulf countries have been affected as a result of the sharp decline in oil prices and the subsequent decrease in the quantities sold as a result of OPEC + agreements to reduce production to reduce supply and thus control the price in global markets. This led to increasing the state budget deficit in most of these countries, which led to a decrease in growth rates, and the loss of a large number of job opportunities, including those occupied by Egyptians, as well as decreasing salaries. Remittances increased in the third quarter of fiscal year 2020/2021, as the following figure shows:
Figure 7: Remittances from Egyptians working abroad
The figure shows an increase in total remittances in the third quarter of the fiscal year to $7.87 billion, either on an annual basis from $6.17 billion in the third quarter of 2018/2019, or compared to the second quarter of 2019/2020, when it reached $6.96 billion. However, the real impact of lower prices will not show until the last quarter of the fiscal year, which is why these remittances are likely to decrease significantly.
The reduction in global oil prices affected the Egyptian economy in more ways than one. The repercussions, following the coronavirus crisis, seem mostly on the downside. However, the reduction in oil prices helped the state budget by decreasing oil subsidies. The result strongly contradicts with the prevailing belief that this decline worked for the benefit of the Egyptian economy; the matter that affirms the need for a complete reassessment of the impact of the crisis on the Egyptian economy on several fronts.