Higher Saudi fuel prices are a small price to pay for reform

Higher Saudi fuel prices are a small price to pay for reform

Saudi Aramco increased the retail price of gasoline for the third quarter of 2019 at the weekend.

The local price for Octane 91 gasoline was raised slightly to SR1.53 per liter and the Octane 95 was raised to SR2.18 per liter. 

Local prices are adjusted on a quarterly basis and are subject to change, depending on the Kingdom’s export prices to international markets.

Riyadh moved to reduce fossil fuel subsidies as severe economic disadvantages emerged from previous subsidies on retail fuel.

The system created inefficiencies and largely benefited those that didn’t really need the support in high income earners.

In the years before the liberalization of energy prices, the local growth of domestic demand for diesel in Saudi Arabia was one of the highest in the world, growing at an irrational pace that did not reflect real demand coming from residents.

One of the reasons for such rapid growth was the smuggling of the subsidized fuel abroad to take advantage of the huge price differentials.

In order to tackle this problem it was necessary to gradually remove subsidies from retail fuel prices and to bring those prices nearer to those prevailing in other  Arabian Gulf countries — thus removing the commercial incentive to smuggle fuel across borders. 

It was a significant step change in thinking and signaled the dawn of a new energy era for the Kingdom.

The removal of fuel subsidies that started at the beginning of 2018 came as an important first step in the path of economic reform of fuel pricing. It has helped to create a more sustainable path as well as opening up domestic competition.

Since the removal of the subsidies fuel demand has been rising at its slowest pace in a decade, which shows what an artificial market it was before.

In the meantime, the Citizen’s Account has helped to create support where it is needed without creating the distortions that were inherent in the subsidy system, because it allows for the price movements when calculating how much support is distributed to where it is needed most.

• Faisal Faeq is an energy and oil marketing adviser. He was formerly with OPEC and Saudi Aramco. Twitter:@faisalfaeq

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