Will Riyadh be next to scrap oil subsidies?
London - Speculation is rampant in the Gulf Cooperation Council (GCC) about the necessity of oil price reform amid dwindling revenues due to low prices.
Recently, with the United Arab Emirates becoming the first member of the oil-rich region to scrap transport fuel subsidies, the question is no longer if but when will rest of GCC follow suit?
As of the start of August, the UAE removed fuel subsidies and made the price of petrol and diesel variable in line with average global prices. This move, which saw petrol prices rise 30% the first day, is viewed as daring but necessary.
However, it affects UAE, where the total population is about 90% expatriate, differently than other Gulf states. Saudi Arabia, for example, has a foreign national population estimated at about 30%, with a total population more than three times that of the UAE.
A debate is raging in the Saudi media and beyond regarding the likelihood of the government easing oil subsidies, with analysts perceiving it as necessary bitter medicine. Bahrain, Oman and Kuwait are considering oil subsidy reforms.
In the last year, global oil prices have fallen to about $49 a barrel, a stark contrast to June 2014 when prices peaked at $115 dollars a barrel.
The International Monetary Fund (IMF) estimated that energy-related subsidies would reach $5.3 trillion in 2015, with the UAE estimated to spend about $29 billion and Saudi Arabia set to provide $106.6 billion. In terms of subsidies per capita, Qatar offers the most at $5,995 per person.
The IMF predicts that because of falling oil prices, GCC states are expected to lose an estimated $380 billion in export revenues.
With regards to Saudi Arabia, the oil powerhouse’s daily output is estimated to be around 10 million barrels per day (bpd), with one-fifth of that going to the local market at prices below the cost of production. This hits the kingdom’s economy in two ways: It is selling a commodity below cost in the local market and is losing 2 million barrels of potential exports.
If this trend continues, Saudi Arabia could find itself importing oil for local consumption because of the kingdom’s ever-growing demand for energy.
Saudi Arabia’s strategy in continuing to pump record amounts of oil is an effort to defend its market share against high-cost oil from Russia, Canada and the United States. Other factors are politically motivated, such as neutralising Russia and Iran, particularly for their support of Syrian President Bashar Assad.
The dramatic fall of the Russian rouble is not only attributed to European and US sanctions but also to a drop in income as a result of low oil prices.
With the lifting of economic sanctions on Iran in the near future, the likelihood of a drop in Saudi oil production is minimal.
Analysts see numerous motivations for the removal of Saudi oil subsidies, according to Saudi economic and oil consultant Mohammad al-Sabban, “We tried to taper off demand by introducing some energy efficiency measures but that will not be sufficient.
What we need is a change in price that reflects the value of energy in order for the Saudi national to adapt to lower consumption of energy,” he said.
Sabban went on to say that the kingdom is facing a period of low oil revenues and the burden of fuel subsidies is more than $53 billion annually, so, if the kingdom continues at this rate without trying to rationalise the subsidies and trying to remove them gradually, this represents a heavy burden on the Saudi budget.
“It is very essential and crucial for any new investment in Saudi Arabia domestically to diversify energy resources including solar energy. The electricity tariffs need to reflect the cost, so if you are selling it below the cost that will add to the burden being carried by the government,” he added.
Sabban said the removal of oil subsidies is not a new concept but has been under advisement for years.
“Now it [is] a matter of necessity,” he said. “Demand for energy domestically is growing at a rate of 7% to 8% annually, and if we continue at this pace, that means that gradually our oil exports will be reduced and that will affect the future revenue of Saudi Arabia. One of the studies predicts that Saudi Arabia could become an oil importer by 2030 if it continues at this rate.”