Ever since oil was first discovered in the Middle East in the 1930s, the monarchies in the Persian Gulf have generously subsidized energy and utilities costs for the population.
While free or very cheap energy has been the cost for the monarchies to comfortably retain power for decades while providing citizens with the abundant natural resources found in their sands and seas, this approach to government subsidies has distorted energy demand in the monarchies in the Gulf—Saudi Arabia, Kuwait, the United Arab Emirates, Oman, Bahrain, and Qatar. The free gasoline, water, or electricity has led, also unwittingly, to a lifestyle of high energy consumption rates in those countries, with consumption much higher than the size of the population or economies would suggest.
Now the Middle East monarchies—which are some of the world’s biggest oil and gas producers—face a dilemma: how to curb that excessive and often wasteful energy use without jeopardizing the reign of the autocratic regimes, Jim Krane, a Wallace S. Wilson Fellow for Energy Studies at Rice University’s Baker Institute for Public Policy, writes in a new book, ‘Energy Kingdoms: Oil and Political Survival in the Persian Gulf’.
According to data from BP’s Statistical Review of World Energy compiled by Bloomberg Opinion columnist Justin Fox, Saudi Arabia—OPEC’s largest producer and the world’s top crude oil exporter—was fifth in the world in terms of oil consumption in 2017, just behind the biggest economies in the world—the U.S., China, India, and Japan. Saudi Arabia, however, has a population of just 33 million people and its economy is not among the world’s top ten—by those standards the Saudi consumption of oil is excessively high.
Some Persian Gulf oil exporters, including Saudi Arabia, have introduced some sort of value-added tax (VAT) on energy and raised the prices of gasoline, diesel, and electricity since the oil price crash of 2014. Many countries in the region have outlined plans to reform energy subsidies, which had provided free or almost-free energy to people for decades. Related: Oil Jumps On Large Crude Inventory Draw
But in doing so, Gulf monarchies and other countries in the Middle East and North Africa (MENA) region, including Egypt and Algeria for example, face a political backlash from subsidy cuts. So, even after the energy subsidy reforms, energy prices in the region are still a fraction of what consumers in free market economies pay.
Apart from reducing the state’s burden of funding energy subsidies, the reforms are also aimed at curbing domestic energy overconsumption in the Gulf countries and thus freeing more oil for exports—the key government income for all oil exporters in the Middle East.
Saudi Arabia and the other oil kingdoms have a delicate balancing act to do—try to cut reckless domestic energy overuse in order to maintain oil exports, while carefully rolling out energy subsidy cuts so as not to cause people’s dissent against the rulers.
According to an October 2018 report by the International Energy Agency (IEA), Outlook for Producer Economies—the outlook for the energy sector in major oil and gas producers, including Saudi Arabia and the UAE—the phasing out of subsidized consumption of fossil fuels is one of six areas that need broader reforms. Related: Natural Gas Prices To Remain Low… For Now
“Pricing reforms have gained momentum in recent years, but the continued availability of oil products and natural gas at artificially low prices encourages wasteful consumption and distorts broader investment incentives across the economy. Even without subsidies, oil and gas exporters would still have a comparative advantage in energy, since a low production cost base can provide a stable low domestic price,” Tim Gould, Head of Division for Energy Supply Outlooks and Investment, and Ali Al-Saffar, Energy Analyst, said in a commentary on the IEA’s report, which examines the situation in Iraq, Nigeria, Russia, Saudi Arabia, the UAE, and Venezuela.
“More than at any other point in recent history, fundamental changes to the development model of resource-rich countries look unavoidable,” the IEA’s executive director, Dr Fatih Birol, said, commenting on the study.
“Following through with the announced reform initiatives is essential, as failure to take adequate action would compound future risks for producer economies as well as for global markets,” according to Birol.
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By Tsvetana Paraskova for Oilprice.com
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Since the 2014 oil price crash, the GCC governments have recognized that subsidizing energy prices has been putting fiscal pressure on their budgets. Low fuel pricing has resulted in excessive consumption of hydrocarbons and the absence of incentives to achieve energy efficiency in the economy. At the same time, renewable energy uptake has been impeded by a lack of competitiveness.
Electricity consumption has been growing at about 7% per year in GCC countries whilst transport fuel consumption has been increasing at an average 7%-8%. At the same time, retail electricity and transport fuel prices for the public have remained low. This has resulted in GCC states no longer being able to meet demand for natural gas with domestic resources, which has increased electricity production costs.
Since the discovery of vast crude oil and natural gas reserves in the GCC countries in the early twentieth-century, the populations of the GCC countries have got used to cheap and subsidized energy prices. Local people see energy subsidies as part of an implicit social contract with their rulers, an essential part of wealth redistribution. Energy is the national wealth and people feel they have a right to consume part of those resources. That is why subsidies are politically very difficult to change
Given that domestic consumption has grown while retail prices have mainly remained the same, costs of subsidizing electricity, transport and water have increased significantly in the last decade. The six GCC members spend an estimated $160-$167 bn annually on energy subsidies according to the World Bank.
The GCC governments hit by the continuing slump in crude prices are starting to trim their budgets, with a particular casualty being the fuel and power subsidies enjoyed across the region. However, they should aim at the elimination of subsidies altogether.
With energy demand in the GCC doubling every seven years, these countries can no longer afford to keep subsidising domestic consumption of their chief export.
An integral part of diversification is intensive investment in renewable energy, particularly solar power and nuclear energy.
Solar power along with nuclear energy could provide all the electricity needs of the Gulf countries. Solar energy could also power an extensive network of water desalination plants. Moreover solar electricity could in the future be exported to Europe earning a very sizeable income for the Gulf countries.
In 2018, the GCC countries consumed 6.29 million barrels of oil a day (mbd), or 35% of a combined oil production of just over 18 mbd. This means that the Arab Gulf countries will have to cut their domestic oil consumption drastically or replace oil by nuclear power and solar energy in electricity generation and water desalination. Failing to do either would result in their relegation to minor crude oil exporters by 2030 or ceasing to remain oil exporters altogether by 2032.
The drive towards using solar power and nuclear power for electricity generation and water desalination should be pursued earnestly in the GCC countries. Using solar power for domestic economies frees up oil and gas for export.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London