Most of the Gulf countries are gas-rich but prone to shortages. Price neither properly reflects costs nor rewards sustainable use, and a lack of price benchmark inhibits policy and investment choices to address the problems this is causing.
- Deciding what gas should cost is complicated by several features: transporting gas and using it rely on expensive infrastructure, so gas does not have an fully international market like oil; it is often produced as a by-product of oil production, and, like other fossil fuels and fossil water, is an exhaustible resource.
- To find the ‘efficient’ price for gas (against which one can compare the price that is set by the state), a producer government will need to assess:
• the current costs of producing the gas (including evaluations for energy and water inputs) and transporting it to its users domestically;
• the capital investment requirements to bring on additional supply to meet expected demand;
and, if applicable:
• the export price for domestically produced gas and how much could practically be exported – often called ‘opportunity cost’; or similarly, the price of the substitute energy source;
• environmental and public health impacts of production, the amounts and costs of these – e.g water pollution, NOx, SOx and fugitive methane emissions.
- Adding in a ‘depletion premium’ to reflect use of an exhaustible resource is sensible in theory, but given the challenges of its calculation, the end-goal of energy sustainability will be more practically met through a charge to incentivize conservation and prepare for switching to other forms of energy.
- Once the efficient price is ascertained, the decision on price is political. It may, for example, adjust price for national and social objectives, e.g. equity of energy access, competitiveness of domestic industry and environmental sustainability.
- An alternative to government price setting would be to ‘allow the market to set the price’ through some form of allocations system and a platform for trading.
- Getting the right market incentives for gas conservation and efficiency in producing countries such as those in the Gulf is complex, but critical; understanding and making transparent the full costs involved is a good way to start.