29/09/2015

For decades, GCC countries have had some of the world’s most generous energy subsidies. With oil prices reaching new lows, authorities are increasingly turning to subsidy reform to help reduce large fiscal deficits. The cost of GCC energy subsidies have long been perceived as unsustainable in the long-term as has the strong growth in energy demand. Fiscal deficits are expected across the GCC as oil prices dropped below $50/bbl; this is well below the breakeven price of most GCC countries. While most GCC countries can finance deficits for some time with substantial sovereign wealth funds, moves to rationalize budgets remain critical in the medium to long term.

GCC countries have already started trimming government expenditures in part by introducing cuts in energy subsidies to alleviate the fiscal burden. According to IMF estimates, energy subsidies in 2015 in the GCC range from 1.1% of GDP in Oman to 4.6% in Saudi Arabia (KSA). While the recent drop in oil prices has reduced the cost of energy subsidies, the negative impact on oil revenues has been larger. For example, Bahrain’s subsidy bill shot up from 17% to 34% of oil revenues and KSA’s from 11% to 20% between 2013 and 2015.

While the primary objectives of energy subsidies is to redistribute hydrocarbon wealth, promote industrial growth and improve the standards of living of GCC citizens, they also bolster wasteful energy consumption, deplete oil resources and reduce oil revenues, not to forget the environmental damage linked to excessive energy consumption. However, there are other more effective means to redistribute the hydrocarbon wealth in an effort to improve standards of living, and boost economic growth, integration and equality.

Low energy prices promote inefficient energy consumption

Low energy prices placed all six GCC countries among the top ten energy consuming countries on a per capita basis in the world, with Qatar topping the list at around 18,500 kg of oil equivalent per capita (koe/capita). Subsidies for gasoline and electricity constitute the biggest chunk of the energy subsidies.

Gasoline prices in the GCC are heavily subsidized and among the lowest worldwide. Prices in KSA are the lowest in the GCC at $0.16 per liter, followed by Kuwait, Bahrain and Qatar at $0.23, $0.27 and $0.27 per liter respectively. Gasoline prices in Oman and the UAE are the highest in the GCC at $0.31 and $0.47 per liter, though they too remain well below gasoline prices charged in the US, China and Turkey. The latter has the most expensive gasoline at $2.54 per liter.

GCC countries started lifting gasoline and diesel subsidies, though steps remain timid and small relative to the size of the GCC energy subsidies. In May 2014, Qatar raised diesel prices by 50%, followed by Bahrain and Kuwait in early 2015. Most recently, Dubai lifted subsidies on gasoline and diesel prices. Prices would be set by the government but linked to international market prices. Despite IMF recommendations, KSA remains the exception, showing no intention so far of deregulating fuel prices.

Electricity subsidies constitute almost half of the energy subsidy bill, with heavy reliance on natural gas as a main resource for production. As per the General Subsidies Initiative, established in 2005 by the International Institute of Sustainable Development and dedicated to analyzing subsidies, GCC electricity production has grown at an average of 7% annually between 1999 and 2008. As demand for electricity continues to grow, most of the GCC countries cannot sustain the high reliance on cheap natural gas for long and hence are facing higher production costs as the electricity prices to consumers remain low.

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NBK Research