Sharing wealth inefficiently in Saudi Arabia

13 September 2011

Low gasoline and electricity prices are fuelling oil consumption in Saudi Arabia, meaning the kingdom is losing out on billions of dollars of export revenues

When Saudi fuel subsidies were last debated in the kingdom in 2007, many experts believed that huge growth in consumption fuelled by low prices was finally going to be curbed by raising prices. The government subsequently lowered them.

The problem Riyadh has is most nationals see paying $0.12 for a litre of gasoline as a right. Any retail fuel price hikes would likely to be met with fierce resistance at a time most Arab states want to maintain the status quo.

While there are many reasons to view low fuel prices as a bad thing, it is still a way of ensuring some of the wealth generated by oil exports is shared with the population. There are still many people in the kingdom who do not earn high salaries and who rely on the cheap gasoline and electricity Riyadh supplies.

[Subsidies still ensure] some … wealth generated by oil exports is shared with the population

Until the kingdom’s infrastructure catches up with the rest of the world, the subsidies do make sense, despite them contributing to the huge boom in demand. Public transport systems are being built and when completed they will offer cheap alternatives to the car.

Also, it is clear that no single government entity can currently make a unilateral decision regarding subsidies, which makes any change in policy difficult to implement. 

With this in mind, the kingdom is very unlikely to change its subsidy policy in the short-term and will keep prices low.

The only real problem is consumption. The kingdom is using its oil at an alarming rate. Only China outstrips the kingdom’s 7.2 per cent growth in gasoline usage, which means the massive increase in refining capacity coming on stream will be swallowed by domestic demand. 

No one seriously believes losing $70bn of oil export revenue every year is good for the country. But until Saudi Arabia has the right infrastructure in place to offer an alternative, Riyadh’s options are limited. 

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