Case grows for subsidy cuts in Saudi Arabia

10 July 2014

If fuel subsidies are curbed and domestic consumption slows down, Aramco can use the new capacity it is building for exports

In the same week Egypt announced it was cutting its fuel subsidies, MEED reported that Saudi Aramco was mulling plans to build a new refinery in Yanbu that was solely aimed at servicing the domestic market.

According to Aramco’s 2013 annual report, it supplied about 4.5 per cent more gasoline to the domestic market last year than in 2012. Diesel supply rose by a more modest 2.4 per cent.

Consumers in Saudi Arabia have access to some of the cheapest gasoline in the world, with prices at $0.1 a litre. This is driving growth and there is no doubt Riyadh will need to curb such profligate consumption in the future by raising prices. However, it looks as though there are no immediate plans to do so.  

Cheap gasoline is viewed by Saudi nationals as a means of wealth sharing and the government knows it is an extremely popular policy. Despite this, there have been numerous calls to curb the subsidy or at least initiate reforms that would lower consumption growth.

Apart from the environmental benefits of slowing fossil fuel consumption, a study by the Global Subsidies Initiative says scrapping fuel subsidies will result in aggregate increases in GDP. The economic case is that the vast sums of money saved from subsidies can be reinvested in areas promoting job and wealth creation.

A study by the Global Subsidies Initiative says scrapping fuel subsidies will result in aggregate increases in GDP

Aramco’s remit does not cover fuel subsidies, but it is responsible for ensuring the kingdom is supplied with fuel. If it is spending money importing gasoline and diesel to meet growing demand then there is a definite commercial case for building a new refinery and producing these products domestically.

Aramco’s refining capacity is growing with the company introducing new facilities at Jubail and Yanbu. If subsidies are eventually curbed and domestic consumption does slow down, the firm will be able to utilise the new capacity for exports.

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