Saudi Arabia reassesses energy subsidies

Article Summary
Saudi Arabia may reform its longstanding energy subsidy policies.

The Saudi government is subsidizing oil products, namely fuel and electricity, by adopting measures in a way that these products reach consumers at low prices, given that Saudi Arabia is an oil-producing country. The government is paying the difference in price to preserve a standard price that is lower than that of the market or to decrease its costs.

It is known that continuous subsidies can encumber the general budget and add to the government’s spending policy, which will affect economic stability. There are many examples of oil-producing countries to corroborate this statement, such as Venezuela. Some countries, however, have started to espouse serious steps toward the process of correcting energy subsidies.

The overuse of energy due to its low price will lead to serious problems in the future, since it is provided in ways that are non-renewable, or subject to depletion. This is why this overuse will cause a dilemma for the coming generations. Additionally, energy subsidies always encourage over-consumption, which will increase resource depletion and decrease investments in other alternative energy resources, such as solar energy.

In addition to this, there is a significant increase in population growth, which will subsequently increase consumption and render the costs of subsidies higher, let alone the health impact of the use of these products. Rationalizing consumption may limit the pollution of the environment. However, I will not touch on this subject because one of the readers may go on and say that the weather is already dusty; a small portion of energy fumes would be fine.

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According to recent IEA reports, Saudi Arabia is competing in the first ranks among Arab and international countries in terms of the biggest country subsidizing energy products. Some estimates show that Saudi Arabia would rank first on the international level with the launching of the five-year plan for development if subsidies continue to increase. This is particularly true with the increase in population growth rate. Saudi Arabia is among the world’s 10 countries whose consumption of energy products is higher than the global average rate.

There is a key factor in increasing the Saudi economy’s growth, productivity and stability on the medium- and long-term financial policy. The latter is represented in Saudi Arabia with the government’s spending policy on education, healthcare, infrastructure, housing, transport and communication (capital spending), which in turn increases labor productivity. This is why, when Saudi Arabia subsidizes energy products, the costs become unbelievably high.

Thus, a very large part of oil revenues will be allocated to infrastructure, education, healthcare, housing and other services and to pay the bill for government subsidies on energy products. This will cause a competition in expenditure, which will cause a slowdown in the economic growth of the country.

The kingdom pays around 70% to 75% of the actual bill of energy prices consumed locally. In its statistics, the UN estimated the Saudi government energy subsidies to be about 10% of the country's GDP (68% of subsidies are allocated to fuel, 32% to electricity). These ratios are likely to increase, given the direct correlation between subsidies and consumption, which is linked to population growth, and urban and commercial development among citizens and foreigners.

Who is the actual beneficiary from the subsidies on energy? There is no doubt that development, economic and productivity plans will be impeded if subsidies on energy products are allocated to the wrong people.

Many governments have used energy subsidies to satisfy all citizens of different living standards. Some regard these allocations as a way to distribute wealth from oil revenues among various segments of society. However, at a closer look, one can clearly notice that the rich are the biggest beneficiaries in this regard. Indeed, the rich own the largest number of cars, factories, commercial trucks, large villas and other properties that require large consumption of fuel, electricity, gas, air conditioning and other household amenities.

The poor, on the other hand, or people with limited income, do not really benefit from subsidies, given the little revenues they receive. In a nutshell, the rich are the biggest beneficiaries of the government energy subsidies, while this policy should allow the distribution of wealth among all strata of society.

Thus, measures and plans ought to be set forth to correct the government subsidies policy so it becomes comprehensive, including clear and long-term goals for the reforms. This will greatly help rationalize consumption, push the wheel of economic growth forward and provide an environment for growth, stable and sustainable productivity.

Energy subsidies programs ought to also be reviewed and not overlooked because energy subsidies is one of the policies that can distort the economic diversification sought by development plans in the kingdom.

There are solutions to correcting subsidies programs, such as direct cash subsidies to certain beneficiaries [but] not all members of society. Current expenditure (such as bonuses, social security programs, food subsidies, wages and others) can serve as a replacement for direct energy subsidies.

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Found in: fuel subsidy, saudi arabian oil, incentives, environmental issues, energy, economic consequences, economic stagnation, class warfare
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