Saudi oil production cut a headache for Israel

Oil pumping  credit: Shutterstock
Oil pumping credit: Shutterstock

The Ministry of Finance's efforts to keep fuel prices from rising are liable to prove even more costly.

This week, OPEC+ (the 13 members of the Organization of Petroleum Exporting Countries and 11 other non-OPEC members) announced that it had decided to adhere to its planned output for the rest of 2023, after cutting production twice since June last year. But Saudi Arabia, the world’s largest oil producer, had other plans. In a unilateral step that surprised many, Saudi Arabi announced that it would cut its oil production by one million barrels a day in July, a decision that is likely to continue to apply in the following months.

The Saudi minister of energy, Prince Abdulaziz bin Salman, announced that the country’s output would fall from ten million barrels a day to nine million. The price of oil responded with a 2.3% rise to $73 a barrel. What lies behind the decision, and how will it affect Israel?

Short-term price boost

Prince Abdulaziz described the move by Saudi Arabia as a precautionary measure meant to bring stability and clarity to the market. "There’s a signal here that that the largest oil producer among the OPEC+ countries has sector limits and that it will not allow prices to continue to decline, even if the decline stems from reduced demand for oil," says Mizrahi Tefahot Bank chief markets economist Ronen Menachem. "China has not yet fully regained its strength, and the Western countries are dealing with high interest rates and slowing economies, so that demand for oil is not expected to recover soon. The Saudi announcement could give prices a short-term boost, but, as long as demand does not recover, it does not look as though this will translate into a sharp, sustained rise."

Deepening subsidy

The Saudi decision to cut oil production will cause headaches in Israel as well. In the past, the Ministry of Finance actually benefitted from jumps in the global oil price, which led to higher prices at the fuel pumps in Israel and thus higher tax receipts. In the past year, however, the situation has been the reverse. Since April 2022, the government has cut fuel prices through reductions in the excise on fuel, resulting in a NIS 2.5 billion loss of state revenues so far.

The current tension between the major oil producers, which has raised the price of a barrel of Brent crude to $77, with more to come, comes at a bad time for Israel. The price rise will be amplified by the weakening of the shekel.

The Ministry of Finance may have to forego more revenue from taxation of fuel, just when state revenues are in general decline, in order to absorb the oil price rise. The question now is how long it can continue with a policy of adjusted the fuel excise monthly. Many of the professionals at the Ministry of Finance do not like this conduct, which is imposed on them from above.

The previous minister of finance, Avigdor Liberman, introduced the policy of excise duty relief last year. He did so after the outbreak of war in Ukraine, which caused oil prices to go wild, with the price per barrel reaching $123 at its peak. Since then, prices have subsided to their pre-war levels.

Current minister of finance Bezalel Smotrich has, however, adopted his predecessor’s policy, and improved on it. In recent months, Smotrich run a policy of close control of prices at the fuel stations. Towards the end of each month, just before the Ministry of Energy is due to publish the new tariff in accordance with the fixed formula, Smotrich signs an order reducing the excise, leaving the price to the consumer almost unchanged. Thus the price of a liter of gasoline stood still at NIS 6.81 from March to May, and rose slightly in June, to NIS 6.85.

The loss of state revenues as a result of the continuation of the tax benefit in June alone is estimated at NIS 176 million. The tax reduction amounts to a NIS 0.50 per liter discount on the price of gasoline, which without the deepening subsidy would have jumped to NIS 7.25 per liter. Under the previous order, the tax reduction was supposed to have narrowed to just NIS 0.10 per liter on June 1.

Published by Globes, Israel business news - - on June 6, 2023.

© Copyright of Globes Publisher Itonut (1983) Ltd., 2023.

Oil pumping  credit: Shutterstock
Oil pumping credit: Shutterstock
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