Energy Fact & Opinion: Reform and Resistance in Kuwait
April 25, 2016
- On April 20, Kuwaiti petroleum workers ended a brief strike that had more than halved the country’s crude production from 2.78 million to 1.1 million barrels per day, and cut refinery throughput from 930,000 to 520,000 barrels per day. During the strike, Brent June futures jumped by $1.12 to over $44 per barrel – a relatively small spike given the scale of the disruption.
- Following the termination of the strike, the Kuwaiti government announced that it would take legal action against participants because Kuwaiti law does not permit striking as a means of resolving labor disputes or as a form of protected speech.
- The strike was called by the Oil and Petrochemical Industries Workers Confederation in response to budget cuts that would lower the salaries and benefits of a large number of public sector employees, including up to 20,000 petroleum workers . These cuts included a reduction in the annual raise received by employees of the Kuwait Petroleum Company.
- These salary cuts are one part of a complex of economic reforms being undertaken by the Kuwaiti government to adjust to a low-price environment. The reforms also include cuts tofuel subsidies for all and water and electricity subsidies for foreigners , as well as the imposition of a Value-Added Tax.
- Kuwait’s budget for the 2016-2017 fiscal year starting April 1 projects a $40.2 billion deficit – almost double projected revenues, resulting from a projected 44 percent decline in oil revenue (based on a very conservative estimated oil price of $25 per barrel).
- Previous economic reform efforts have stalled, including a failed attempt to reform fuel subsidies in early 2015 that was stymied by popular and parliamentary opposition. Because of the extent of resistance to fuel subsidy reforms, Kuwait was the last GCC member state to implement them.
The Kuwaiti petroleum workers’ strike removed a significant amount of Kuwaiti crude from the market – over 1.5 million barrels – but spurred a surprisingly minor jump in global oil prices following the failure of the Doha production freeze meeting. Given the global market’s oversupply, the abundance of oil in storage, and the ongoing competition for market share among major producers, traders seem to have bet that because it would be short-lived, the disruption of Kuwaiti production would not have a major effect on markets. While this suggests that labor unrest in Kuwait is unlikely to have a significant short-term global impact, the implications of the strike for Kuwait’s long-term trajectory could be critical: the strike has signaled that the economic reforms under consideration by the Kuwaiti government are likely to continue facing popular pushback. Though this will make the government’s job of paring back spending in the face of low oil prices more difficult, it also represents a part of the process by which Kuwaitis determine who must make sacrifices as the country’s oil revenue declines. Such negotiations are necessary and are to be expected, especially in a more or less democratic country like Kuwait, where debates over the distribution of petroleum rents are central to political life. This round of strikes indicated that many Kuwaiti petroleum sector employees are willing to use their critical role in the economy to defend their share of Kuwait’s shrinking oil wealth, and the threat of legal action against strikers signals the government’s determination not to negotiate how that wealth is to be distributed under duress. It remains unclear whether Kuwait’s petroleum union will resume its strike if its demands are not met, or if the government will actually prosecute participants, but in Kuwait as elsewhere in the region, persistent low hydrocarbon prices likely will force countries to debate hard choices about resource allocation. But compared to the relatively minor market fluctuations caused by the tactics used in these debates, their outcomes could have serious implications for the economic and fiscal trajectories of important oil producers like Kuwait.