Senior Research Fellow, Energy, Environment and Resources

To rationalize fuel use, GCC governments must ensure that gradual price rises are accompanied by stronger institutional and legislative support for energy efficiency, writes Glada Lahn.

A Saudi man walks past a pump at a petrol station in Jeddah. Photo: AMER HILABI/AFP/Getty Images.A Saudi man walks past a pump at a petrol station in Jeddah. Photo: Getty Images.

Summary

  • A period of lower global oil prices is enabling oil-exporting Gulf countries to reform heavily suppressed energy, water and food prices at home. While domestic fuel prices in those countries remain well below international market levels, rises of between 60 per cent and 133 per cent have, in some cases, taken place overnight.
  • Continued reforms will have wide-ranging implications for business and the political economy – particularly in the largest of the Gulf Cooperation Council countries, Saudi Arabia, which is accustomed to some of the lowest fuel and utility bills in the world. 
  • Changes to domestic gas and diesel prices will affect, above all, industry; of particular significance is the separation of the price of ethane from that of sales gas in Saudi Arabia and the prospect of gas contract revision in the United Arab Emirates.
  • Higher fuel prices should drive increased efficiency in the power and water sectors. However, patterns of allocation and financial transfers within government, in some countries, mean that step changes will be incentivized only through the further unbundling of utilities.
  • It is worth taking a ‘nexus’ view of price reforms. Transport fuel and water price revisions in Saudi Arabia will affect the logistics sector and agribusiness and these changes will begin to trickle down into retail products, raising the prospect of further inflation and measures to limit it. The alfalfa phase out is expected to free up large volumes of groundwater, potentially reducing desalinated water demand in the north and therefore saving fuel.
  • This is not the first time that reform plans have been tabled, but their role in the social contract, as well as regional threats to stability and rising oil revenues, previously stalled their progress. These reforms go beyond cutting subsidies, with wide ranging diversification objectives and plans to tax some drinks, food and tobacco products for the first time.
  • Smooth transition to more efficient pricing regimes will entail smart redistribution measures – particularly in Bahrain, Saudi Arabia and Oman – and harnessing the benefits of new growth sectors. Efficiency and renewable energy markets are two sectors with major potential if governments encourage them to develop.