Saudi energy subsidy cuts an early success

Saudi energy subsidy cuts an early success

Amidst the many reforms the Saudi Arabian government has planned, there is at least one for which it can already claim success. Even though the reforms on energy subsidies are just getting started, new evidence reveals they are already having a positive impact. Saudi Arabia’s cuts to electricity subsidies will not be fully implemented until 2025, but already almost three-quarters of Saudis are looking to cut their electricity usage.

In a recently released survey of Saudi consumers, Al Rajhi Capital presented compelling evidence that, even before the subsidy cuts fully come into effect, they are positively influencing the country. According to Al Rajhi, 71 percent of consumers are planning to cut electricity usage and 55 percent are planning to cut gasoline usage due to the subsidy cuts. This not a sign of austerity as much as a sign of “more efficient and rational usage.”

As Al Rajhi explains it, electricity and gasoline are generally considered inelastic commodities, with a fixed amount of usage amongst the population. In other words, economists and political scientists expected that Saudis would need to continue their same energy usage and just spend more money as prices rose. However, as Al Rajhi puts it: “Contrary to general economic sense,” the subsidy cuts are resulting in a “significant inclination to decrease usage.” It turns out that there was excess energy usage and there is now an incentive to curtail that. In fact, “most consumers have (already) started reducing electricity and gasoline usage.” Whereas previously there was wasteful usage, the survey shows that Saudi consumer habits are now trending toward efficiency.

When the government cuts energy subsidies, it could have led to increased spending nationwide. That would have led to debt incurred by citizens. Instead, the indications are that the government decision is leading to the best possible outcome: Decreased energy usage. From an overall societal perspective, these price hikes seem to be a success in three different ways.

The cuts in energy usage in Saudi Arabia will benefit the Kingdom’s environment and, more specifically, its air quality

Ellen R. Wald

First, the government is saving money it had been spending to subsidize energy and gasoline for Saudi consumers. This was an expense that the governments of most developed countries do not incur. Saudi Arabia is considered a G-20 country, meaning it has one of the 20 largest economies in the world, but such subsidies were hampering its ability to operate as one. A government cannot fund the everyday needs of its people — such as energy consumption — and still remain efficient. In a modern economy, if a government is to subsidize the necessities like electricity, it would have to tax the people at enormous rates. Even the Saudi oil industry is insufficient to overcome this basic economic fact for much longer.

Second, the cuts in energy usage in Saudi Arabia will benefit the Kingdom’s environment and, more specifically, its air quality. Although Saudi power plants are shifting toward using natural gas as a power source, the country still burns a lot of crude oil for electricity. This is a particularly dirty way to generate power, so decreasing excess electricity consumption is helpful to the environment. This is also one of the reasons that Saudi Arabia is seriously investigating building nuclear power plants and has even spoken with Russia about importing natural gas for power generation. Saudi Arabia may be rich with crude oil resources, but crude oil is an inefficient, costly and dirty way to generate electricity.

Third, cutting excess electricity use and excess gasoline purchases means more revenue for the Saudi government. For every barrel that Saudi consumers conserve when they decrease their electricity and gasoline usage, Aramco can export another barrel to overseas customers. That means more revenue for Aramco, which employs more than 60,000 people, and more revenue for the state. In short, the most efficient use for a barrel of oil is as an export commodity to make a profit.

The energy subsidy cuts are already demonstrating success because they reflect an instance in which the government got out of the way of the free market. Although the subsidies might have felt normal to Saudi citizens, who were used to paying very little for energy and gasoline, the government was actually interfering with the free market to such an extent that consumers were engaging in wasteful behavior. Government action, in this case, ended many years of interference. Now the domestic energy and gasoline markets in Saudi Arabia are heading more toward the free market. Costs for consumers are higher as a result, but the market is more efficient.

Many of the Saudi government’s economic reforms will not show measurable results for years. That is the nature of the plans, such as the PIF Program or Neom. However, the Saudi government can already point to the energy subsidy cuts with pride.

  • Ellen R. Wald, Ph.D. is a historian and author of “Saudi, Inc.” She is the president of Transversal Consulting and also teaches Middle East history and policy at Jacksonville University. Twitter: @EnergzdEconomy

 

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