Benefits from lower oil price. Smaller deficit and more growth in 2015 - Lebanon

Benefits from lower oil price
Smaller deficit and more
growth in 2015
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Decreasing oil prices, reaching a five-year low, will have a positive impact on the local economy.

Citibank said in a report, this month, that lower oil prices directly benefit current accounts. The oil import bill should drop by around $1.2 billion in 2015, which means savings to the current account of around 2.3 percent of GDP. Citi estimates the import bill for oil to be at around $5.2 billion for 2014.

The public budget deficit will narrow which is currently exacerbated by a $2 billion yearly transfers to the Electricité du Liban (EDL). Economist Marwan Iskandar said: “At least $750 million in savings are expected in imports of oil derivatives for power plants, and therefore would register less deficit of the budget due to electricity.”

“A lower budget deficit and a lower oil import of bill will have a positive impact, by reducing inflation,” said Iskandar. Inflation is expected to stay below four percent this year, according to Central Bank (BDL) estimates.

Consumption of gasoline, fuel for heating, butane gas, or airline fuel would benefit from savings of around $500 million from oil derivatives.

EDL is trying to reduce deficit pressure. “A 40 percent drop in the price of oil reduces EDL’s deficit by $660 million,” said Walid Mezher, EDL board member. “We are optimistic about any savings that will appear in BDL’s financial statement for the last quarter of 2014 and the first quarter 2015,” he said. However, Mezher said that “EDL will continue to record a deficit until the price of an oil barrel drops to below $20.”

A reduction in oil prices will definitely impact the industrial sector positively. “It will reduce production and operational costs and give industrialists the opportunity to compete better in local and international markets,” said Mounir Bissat, Chairman of the Syndicate of Food Industrialists.

Farmers who rely on generators to pump water from artesian wells to irrigate their lands will also be impacted positively. Fuel, which represents around 20 percent of their operational costs, would drop to around three percent, said Antoine Howayek, Chairman of the Farmers’ Association.

The prices of fuel derivatives are set to drop even further locally. This has partially reduced the profits of oil stakeholders. Owners of gas stations usually buy fuel stocks every eight to ten days. Gas stations make LL1,600 ($1.06 or a net of $0.7) per 20 liters of octane. Sami Brax, head of the Gas Owners syndicate, said: “We lost LL700 ($0.46) for every 20 liters of gasoline in a period of ten days during December.”

The cost of stocking gas is going down, in parallel. Fadi Bou Chakra, advisor to the syndicate and Coral-Damour gas station owner said: “Instead of paying $30,000 for gas supply to fill up our station, we’re paying $21,000.”

Any eventual decrease of public spending or economic growth in oil exporting countries due to lowered oil revenues may lead to a decrease in expat remittances, according to Iskandar. But Marwan Barakat, Head of Research at Bank Audi disagrees: “The flow of remittances remained healthy in the banking sector in 2009 and 2010, when oil prices dropped from $150 to $30, due to the 2008financial crisis ,” he said.

The international reduction of oil prices might have a negative impact on the appetite of oil companies for local marine resources. Walid Khadduri, Consultant at the Middle East Economic Survey (MEES), said: “Oil firms that might have potentially been interested in local natural resources are now scanning other options in East Africa, specifically Mozambique and in the Persian Gulf.”
Reported by Leila Rahbani
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Date Posted: Dec 29, 2014