G7 should opt for fuel tax cut over price cap, says Saudi-based analyst

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• Feasibility of implementing price caps is doubtful
• Each G7 country has its own energy market structures 
• Regulations stop G7 EU countries subsidising energy domestically

A proposal by the G7 group of leaders to look at the feasibility of introducing a price cap on energy imports was dismissed as “highly doubtful” by a top Saudi-based energy analyst.

A report by the Financial Times on Tuesday claimed that the G7 leaders – which includes Canada, France, Germany, Italy, Japan, the UK and US – were exploring an option to introduce a temporary price cap on energy imports, as part of a package of economic measures against Russia, and to halt the soaring cost of fuel on Western consumers.

“The feasibility of implementing such price caps is highly doubtful,” Ramy Al-Ashmawy, senior energy specialist at the Saudi-based Arab Petroleum Investments Corporation (APICORP), told AGBI.

• Saudi to raise oil production if Russian output falls

“The first issue to consider is that G7 countries are not a homogeneous group.

“Each country has its own energy market structures and dynamics. Moreover, EU regulations will not allow certain countries in the G7 bloc to essentially ‘subsidise’ energy domestically, at the expense of other non-G7 EU countries.

“The second issue to consider is the scope of this cap: will it be placed on commercial energy prices or non-commercial (eg residential), or both? And on which energy products will it be placed (gasoline, electricity, LPG/natural gas, etc.)?” 

During the first three months of this year the price of Brent crude rose 29 percent quarter-on-quarter to reach an average of $103 a barrel, its highest level since the third quarter of 2014. In 2020, as demand collapsed on the back of the coronavirus pandemic, Brent crude averaged just $42 a barrel.

Fuel prices in the UK have risen from $1.82 a litre in June 2021 to $2.19 in May 2022, while in the US prices have soared from $0.81 a litre to $1.17 during the same period, according to data compiled by the Trading Economics website.

With prices rising, Al-Ashmawy said a better alternative to a price cap would be for G7 governments to consider using their tax apparatus to reduce prices at the petrol pumps.

“The only possible way to reduce energy prices for end users is through each government applying variable tax cuts on energy commodities to cool down domestic end user prices up to a certain point,” he said.

“Trying to do so any other way presents formidable complexities that would be difficult to untangle.”

Earlier this month, APICORP reported that the Middle East is boosting investment in oil and gas, bucking the trend seen globally.

The MENA region is forecast to invest $879 billion in energy projects from 2022 to 2026, an increase of 9 percent over the previous five years, according to APICORP’s latest MENA Energy Investment Outlook report.

The report found that global investment in oil and gas stood at $504 billion in 2019, before the pandemic. The figure tumbled to $352 billion in 2020 and is projected to reach $494 billion this year.

In the MENA region, however, investment in oil and gas projects has surpassed pre-pandemic levels and is forecast to rise again this year. In 2019, the region invested $78 billion in oil and gas, representing 15 percent of global investment.

This fell to $72 billion in 2020, but recovered to $86 billion, 21 percent of global funding, in 2021. In 2022, investment is expected to increase again to $90 billion.

“This shows that the MENA contribution to global energy investments in the oil and gas is actually defying the global trend,” Al-Ashmawy said.

“The region is bearing the burden of maintaining energy security, contrary to the narrative that is now prevailing in the media that OPEC+ is not doing enough to ease the energy crisis. That is not true.”