May 1, 2012

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TSG IntelBrief: Jordan’s Energy Crisis Could Spawn a Political Crisis

?As of early May 2012, the ability of the Hashemite Kingdom of Jordan to avoid the fate of its southern neighbor, Egypt, might depend in part ? much as it did in Egypt ? on simple inflation. In Egypt, it was the unreasonably high price of bread and lentils that helped spur the demonstrations; in Jordan, it might very well be the exorbitantly high price of electricity that fuels further unrest in the already volatile country.

Political events are quickening as the temperature rises, with the just-announced resignation of Prime Minister Awn Khasawneh sending the small country into its fourth government since the Arab Spring began in early 2011. In his letter appointing Fayez Tarawneh as Prime-Minister Designate, King Abdullah II made it clear he expects progress on the political reforms called for by a rising minority in the country. We had written previously that the King would likely be forced to give up a degree of his autonomy in exchange for political stability and, hopefully, economic growth. Here we return to that thesis ? which appears to be unfolding within the dynamics of the current turmoil ? with a specific focus on how the price of electricity might prove to be the catalyst that propels the kingdom into reform even more quickly than was envisioned just months ago. To place this in meaningful context, it is helpful to briefly turn once again to Egypt as a case study, one that might facilitate a deeper understanding of the problematic interplay of economics and politics for a regime on the edge.

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Rising Energy Prices Could Drive Political Unrest

The regularly recurring disruptions of natural gas from Egypt to Jordan through the Arab Gas Pipeline (which also supplies Lebanon and Syria) have placed tremendous pressure on the Jordanian electrical production system. Due to the shortage of natural gas, Jordan has been forced to increasingly rely on more expensive oil and heavy diesel fuel to generate power, which led to an estimated loss of more than US$ 960 million dollars in 2011 alone. In 2012, the losses are projected at US$ 5 million per day due to the substantial difference between what it costs the Kingdom to produce electricity and what it charges its citizens for that energy. It is estimated that Jordan's generation cost is 184 fils (a subunit of the dinar) per kilowatt-hour (kWh), while the government charges consumers only 73 fils per kWh. This imbalance is unsustainable over the long-term for such a small and fragile economy; as a result, the government had intended to implement price increases to make up for the shortfall.  Political realities, however, have trumped economic realities in the near-term. The government is acutely aware of the potential consequences of raising electrical prices at this juncture, when further pressure on already strained household budgets creates the serious risk of inviting unrest on the scale of Egypt.

Such situational awareness led to the March 2012 announcement from the government of a two-month delay in implementing the much-needed price increase. That increase ? originally set to take effect this month ? has been again put on hold, this time to allow Tarawneh, the Prime-Minister Designate, to assume office and appoint a new cabinet. Clearly, the incoming government will not want to immediately increase electricity rates just as the need for air conditioning and other basics of life in Jordan increase with the advent of summer's scorching temperatures. However, economic realities can be delayed for only so long, and unless regular and dependable natural gas supplies are quickly restored from Egypt, Jordan will further deplete its treasury and become ever more dependent on foreign aid. Then again, as in the case of Egypt, increased western financial aid is by no means a guarantee of protection against an uprising. King Abdullah II clearly understands this, and is racing to implement controlled political reform before the deadly combination of pressures and prices create a situation that is beyond his control.

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Political Stability at the Cost of Political Autonomy

It remains to be seen if the new government led by Tarawneh is able to effectively ? and expeditiously ? shepherd through the needed reforms in a transparent and timely manner that would then enable it to implement the price increases necessary to gain control of its finances. The incoming Prime Minister is very close to the King, and is a familiar figure to the United States as well, having led the peace talks with Israel in the early 90's. The resignation of Khasawneh, said to be over the king's frustration at the slow pace of political reform, is concrete evidence of the King's commitment to remain ahead of popular sentiment and avoid Mubarak's fate.

Nonetheless, the unavoidable ground truth is that controlling the multifaceted and often intractable inflationary pressures on a vital commodity ? bread in Egypt and electricity in Jordan ? is likely to prove as difficult to achieve as it is vital to longevity of the regime.? ?     ?

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