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Raising fuel prices still a challenge

THE issue of raising fuel prices will remain a challenge as the Saudi government plans to further increase the cost of all types of fuel. As part of fiscal reforms, the government will gradually raise prices until 2025, when all fuel in the Kingdom should be sold at prices similar to those abroad.
Starting on Jan. 1, fuel prices were increased for the second year in a row by 120 percent for octane-95 and by 84 percent for octane-91. Diesel prices will not be increased this year, to support the industrial activities that rely on the fuel.
After the second fuel hike, many people started debating the viability of such a move as the pain was felt at all levels of society. There are still those who favor the decision.
Below is a summary of the debate between those who favored the move and those who opposed it.
There are many benefits for raising fuel prices in Saudi Arabia, as its proponents claim. Some of these have been highlighted by the Minister of Energy and Industry, Khalid Al-Falih.
First, the government can free up more cash for other developmental projects. Al-Falih once said the govern- ment estimated that about SR300 billion ($80 billion) is given in the form of energy subsidies and that if this money is directed to other areas, such as health care or education, the “wasted income” will be enough to build hundreds of schools and hospitals at home.
Second, consumption of liquid fuel will be cur- tailed. The Kingdom consumes about five million barrels a day (bpd) of liquids (crude oil, liquefied petroleum products, petroleum products, etc), with products making up almost 2.5 million bpd of that figure. As the Saudi population grows, there is a fear that without demand-side adjustments this figure may go up to eight million bpd, according to Al-Falih, and that will put pressure on the Kingdom’s resources.
Third, the Kingdom can free up more crude and products for exports, and will enable it to preserve its role as the world’s largest oil exporter and one of the top exporters for products after the addition of three new refineries. Saudi Arabia seems to be sticking to its current crude production capacity of 12.5 million bpd for many years — at least for the next five. Therefore, there is no way for the Kingdom to keep increasing its exports to meet global demand without cutting back on local consumption, knowing that it is now about to add a new refinery in Jazan by next year and plans another plant in Yanbu to process 400,000 bpd of oil directly into chemicals.
Fourth, there is an indirect benefit that again can be linked to consumption, which is limiting smug- gling crude outside the country. There are no figures announced regularly on this, but the numbers are huge in many estimates. The reason for this is fuel arbitrage. Saudi fuel prices were lower than most in the region and that encouraged many to smuggle the crude to surrounding states, but now it might not be worth taking the risk as gasoline prices are similar almost everywhere. Diesel remains, however, prone to smuggling until the government raises its prices in the near future according to its plans.

Debate on the viability of further price hikes is growing, with the nancial pain felt at all levels of society.

Wael Mahdi

Finally, there are efficiency gains expected since industries as well as residential users will rationalize their consumption and eliminate waste. The energy intensity in Saudi Arabia (energy used to produce every dollar in the GDP) is higher than that in the US and elsewhere, which shows that energy is not used wisely to generate national wealth.
First, the increase isn’t in favor of consumers as there is no viable public transport system in the country that can give people alternatives. Many peo- ple against the hike said they were not opposed to the move itself but only against the timing. It would have been better if the government had first completed the public transport network to which it committed itself before taking any action.
Second, also related to timing: The hike came at a time when the economy is facing major challenges. The overall economy contracted 0.5 percent in 2017 as the oil GDP shrank 4.3 percent and non-oil GDP rose 1.5 percent.
Third, another timing-related issue: The hike in fuel was implemented in parallel with the introduc- tion of value-added tax. This has put a lot of pressure on Saudis' disposable income.
Fourth, many argued that the cost of producing oil and fuel in Saudi Arabia is very low compared with that in all major oil-producing countries outside OPEC and that sale prices should be matching the cost of produc- tion at home. Also, some argue that local fuel prices should not be linked to international reference prices since pump prices in all industrial countries are made up heavily of government taxes that can be at least 25 percent. Al-Falih even acknowledged that Norway charg- es higher prices because of the hefty taxes on products.
Fifth, some are arguing that cheap energy is the real competitive advantage for Saudi industries, and without it industrial expansion or attracting foreign investors will be difficult.
Sixth, cheap energy is a recipe for economic growth and without that it would be hard to see a high level of growth. China, for example, relies heav- ily on coal for electricity as its cost is very competitive with all other types of fossil fuel.
Finally, some are challenging the economic logic used when Al-Falih said the government is basing its judgment on prices its products can fetch when exported. This last point makes the topic change from cost of subsidies to cost of opportunity, and those are very different areas.
In all cases, the decision has been made, but it seems that Riyadh is open to modifying parts of the plans as necessary. The royal decrees to give away monthly allowances for one year to people to offset the rise in cost of living that followed the fuel-hike showed that the government is concerned not to harm its citizens, and that strikes a balance between those who are with or against. That sent a very posi- tive message to the Saudi people.
  • Wael Mahdi is an energy reporter specializing on OPEC and a co-author of “OPEC in a Shale Oil World: Where to Next?” He can be reached on Twitter @waelmahdi