What do falling oil prices mean for Egypt?

Amid an energy crisis that has led to rolling blackouts even in winter, it is only natural that Egyptians are obsessed with what the recent plunge in oil prices means in the short term: can we stretch our limited supplies of hard currency to import more oil and, to a lesser extent, gas? Is this an opportunity to accelerate the phaseout of energy subsidies? Will macro support and investment from our natural (and largely oil-dependent) allies in the Gulf Cooperation Council countries continue to flow? Will limited fiscal resources create new room for the private sector to participate in the energy sector, particularly with new feed-in tariffs, new approvals for coal imports, and streamlined licensing procedures for private-sector factory owners who want to invest in captive power plants?

As natural as these questions may be, we need to look beyond immediate concerns to more fundamental issues, because we have a once-in-a-generation opportunity for a reformist government to not just lay the foundation for a more secure energy future, but to create whole new industries – and perhaps hundreds of thousands of jobs – in the process.

How? By delving into two questions. What’s the optimal energy mix for Egypt? And how can we most efficiently harness the resources we have today?

Striking a balance between resources and needs

With the state’s energy subsidy bill for the current fiscal year already down by around 30%, I would argue that the Government of Egypt should consider channelling some of the windfall into both exploring a healthier mix of energy sources (one that includes renewables) – and into new industries to derive maximum benefit from those resources we have. In parallel, we need to convince some 90 million people to change their behaviours and move from a ration-based system to one of cash transfers for the needy.

Energy security begins by striking an optimal balance between your resources and your needs. No matter how you look at it, it is clear that the rounding out of our energy mix must begin with solar energy. After all, energy policy needs to be set not with today’s exchange rate in mind, but tomorrow’s. The Central Bank of Egypt eased its defence of the Egyptian pound earlier this week, and dollar availability remains poor, not just because of the downturn in the tourism industry, but because tour operators have slashed their rates – a decision from which the length of a recovery is measured in years. In the context of a fast-growing economy like Egypt’s, that means more energy imports going forward at even less advantageous exchange rates.

Needless to say, solar energy is not imported, and Egypt has some of the best conditions in the world for solar power generation. (We have somewhat less pronounced advantages in wind power, but it remains part of our mix.) So significant is the nation’s solar potential – and so advanced is the technology, the cost of which has fallen by as much as 70% over the past five years, thanks in large part to Germany’s push for renewable energy – that newly released feed-in tariffs for private-sector producers have prompted nearly six dozen companies (including global energy giants and domestic upstarts alike) to seek and win pre-qualification from Egypt’s New and Renewable Energy Authority.

It is still early days, but Egypt is clearly also making progress in the responsible use of coal. Limited approvals for imports are now in place, the environmental guidelines are increasingly clear, and the development of domestic handling infrastructure has begun. As the process unfolds, we also need to look into cooked (not burned) coal.

In parallel, we need to fully explore whether civilian nuclear power should be part of the picture, and the Sisi administration’s drive to settle overdue debts to international oil companies is paying dividends: international oil companies have signed dozens of new exploration and production contracts in recent weeks, ensuring we will make good use of our remaining hydrocarbon wealth. What’s more, we have barely scraped the surface of what could be done with refuse-derived fuels.

Making the most of what we have

With an optimized mix of energy resources in place, that brings us to the second question: how to make the best use out of the resources we have. Here, Egypt needs to stay the gutsy course upon which we embarked last July when the administration began removing fuel subsidies. Behaviour is key to efficiency, and nothing ensures responsible behaviour – on the part of consumers and business alike – more than market prices alongside a cash-based social safety net for the most needy in society.

If energy is properly priced, fresh investment will flow into our ageing refining infrastructure, where the $3.7 billion facility my company is building to start production in 2017 is not by itself sufficient. The expensive and inefficient programme of state-subsidized butane and propane cylinders must be done away with, as millions of households are connected to the national gas grid. Mass transport in urban centres suffers from generations of under-investment, and light and heavy rail alike remain almost entirely unexplored (though recent memoranda signed with Chinese companies suggest the rail part of the puzzle is now starting to drop into place).

Making Egypt energy efficient

In short, we need to introduce the entirely foreign concept of “energy efficiency” into the Egyptian lexicon. I would wager that not one of our nation’s 20 million homes is insulated, to say nothing of our tens of thousands of offices and hundreds of thousands of cars. The notion of double-glazed windows, gasketing, films and waste-heat recovery systems are almost entirely alien. We burn petrol without a thought to its cost, embracing large engine sizes in heavy new sedans and SUVs – and hundreds of thousands of vehicles roam our streets every day that would be antique in any other country.

We have, in other words, absolutely no building code or energy efficiency regulations. How much would it cost to enlist a handful of consultants to draft them? And what sort of opportunities would that open up? If you’re even passingly familiar with the imaginations and resourcefulness of Egyptians, consider what we could do if guided to make these a priority. Imagine the jobs these new industries – exactly the medium weight, medium technology industries that we are best suited to – could create.

Even our friends from the advertising agencies would profit, being called on to create the type of “turn off the lights” PSA campaigns I saw while a student in the United States decades ago.

For this to work, the alternative – i.e. waste – must hurt. Energy needs to be priced right, and the way to do this is through the elimination of subsidies and ration cards in favour of market prices and cash transfers to qualified beneficiaries.

The naysayers will argue that the $260 billion or so invested globally in renewables every year for the past five years was a blip made possible by high oil prices. Everyone from China to Saudi Arabia is scaling back their investments in renewables today. “Peak oil”, they say, is either a figment of your imagination or an event pushed far back over the horizon by new technologies including fracking, horizontal drilling and other enhanced oil recovery techniques.

They are wrong. As The Economist recently pointed out: “On a 15- to 25-year time horizon, today’s slide in the oil price needs to be set against the likely long-term trend. Futures markets are betting that the oil price will be back to $90 per barrel in the early 2020s.”

The question we need to be asking ourselves today is whether we want to enjoy at most a half-dozen years of respite, or bypass the problems we now face and create hundreds of thousands of jobs in the process.

Author: Ahmed Heikal is Chairman and Co-Founder of Qalaa Holdings.

Image: An attendant prepares to refuel a car at a petrol station in Rome January 4, 2012. REUTERS/Max Rossi