This week, OPEC+ (the 13 members of the Organization of the Petroleum Exporting Countries and 11 other non-OPEC countries) announced that it had decided to stick to its planned production for the rest of 2023, after cutting production twice since June last year. But Saudi Arabia, the world’s largest oil producer, has other plans. In a unilateral move that surprised many, Saudi Arabia announced that it would cut its oil production by 1 million barrels per day in July, a decision that is likely to continue to be implemented in the coming months.
The Saudi Energy Minister, Prince Abdulaziz bin Salman, announced that the country’s production would drop from ten million barrels per day to nine million. The price of oil responded, rising 2.3% to $73 a barrel. What lies behind the decision and how will it affect Israel?
price increase in the short term
Prince Abdulaziz described Saudi Arabia’s move as a precautionary measure aimed at achieving stability and clarity in the market. “There is a sign here that the largest oil producer among the OPEC+ countries has sectoral limits and that it will not allow prices to continue falling, even if the decline is caused by lower demand for oil,” says Ronen, chief market economist at Mizrahi Tefaha Bank. Menachem. “China has not yet fully recovered its strength, and Western countries are dealing with high interest rates and slowing economies, so oil demand is not expected to recover soon. The Saudi announcement may give prices a boost in the short term, but, as long as demand does not recover, it does not seem That this will translate into a sharp and sustained rise.”
Deepening support
The Saudi decision to cut oil production will also cause headaches in Israel. In the past, the Ministry of Finance actually benefited from jumps in world oil prices, which led to higher prices at fuel pumps in Israel and thus higher tax revenues. But last year, the situation was reversed. Since April 2022, the government has lowered fuel prices by reducing taxes on fuel, resulting in a loss of NIS 2.5 billion in state revenues so far.
The current tension between the two major oil producers, which has pushed the price of a barrel of Brent crude to $77, with more to come, comes at a bad time for Israel. The price hike will be amplified by the weak shekel.
The Finance Ministry may have to forgo more revenue from fuel taxes, only when state revenues are in an overall decline, in order to absorb higher oil prices. The question now is how long you can continue with the monthly fuel tax adjustment policy. Many professionals in the Ministry of Finance do not like this behavior imposed on them from above.
The ex-Finance Minister, Avigdor Lieberman, introduced the excise tax exemption policy last year. He did this after the war broke out in Ukraine, which caused oil prices to skyrocket, with the price per barrel reaching $123 at its peak. Since then, prices have fallen back to pre-war levels.
But the current Finance Minister, Bezalel Smotrich, has adopted and improved the policy of his predecessor. In recent months, Smotrich has implemented a policy of strict price control at gas stations. Towards the end of each month, just before the DOE publishes the new tariff according to the fixed formula, Smotrich signs an order lowering the tax, leaving the price to the consumer virtually unchanged. Thus, the price of a liter of petrol stabilized at 6.81 shekels from March to May, and rose slightly in June to 6.85 shekels.
The loss of state revenues due to the continuation of the tax benefit in the month of June alone is estimated at 176 million shekels. The tax cut amounts to 0.50 shekels per liter discount on the price of gasoline, which had it not been for the increased subsidies, would have jumped to 7.25 shekels per liter. Under the previous order, the tax cut was supposed to be reduced to 0.10 shekels per liter on June 1.
Published by Globes, Israel business news – en.globes.co.il – on June 6, 2023.
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