A recent report by the International Monetary Fund (IMF) flagged rising energy consumption as a serious long-term policy challenge facing GCC economies. It linked this problem to long-term economic health as well as fiscal sustainability, arguing that if the problem is not adequately addressed, it could reverse GCC economies gains.

Advice by the IMF (and the World Bank) does not usually interest GCC citizens, who dismiss the two organizations as irrelevant to their concerns. They are seen as trying to use the GCC as a resource to help other regions, while ignoring GCC needs. Another beef with the twin organizations is that they rarely utilize local talent and expertise, leading to dismissal of their prescriptions as irrelevant and alien.

However, in this report at least the IMF appeared to begin to look at GCC issues independently of other regions, although the GCC-as-derivative paradigm still peeks through the pages, and especially in the recommendations.

It is true that the GCC countries have some of the highest levels of energy consumption per capita in the world and some of the lowest prices. Growing populations mean that, in the absence of policy reforms, domestic energy consumption is likely to continue to rise.

According to calculations made by the Saudi Center for Energy Efficiency (SCEE), energy intensity has been growing at spectacular speed. In 2013, it took nine times the amount of energy to produce one unit of GDP, compared to 1975.

In fact, demand for energy has long surpassed rates of economic growth and population growth. In Saudi Arabia, energy consumption rises by over 8 percent annually, while economic growth was estimated at only 2 percent during 2013, and national population grows by about 2.5 percent annually. As I pointed out in a recent article, Saudi Arabia plans to produce an average of 3,500 megawatts of electricity annually for the next decade. That increase alone in one year is enough to power several medium-size countries.

While low energy prices may be seen as one of the ways that oil wealth is distributed to the population, it could be argued that those benefits are heavily skewed toward the better off, because prices are kept low for all, whether they needed that help or not.

This is the problem in a nutshell. How does the IMF propose to solve it? In typical fashion, the IMF believes that only through the price mechanism could GCC countries curtail energy consumption. It cites (its own) research to support that conclusion. One study argued that “a gradual upward adjustment in domestic energy prices over time would help curb the rapid growth of domestic consumption, redirect existing incentives in the growth model away from energy intensive industries, and strengthen the fiscal position.” Another suggested “GCC countries could significantly reduce energy consumption over the long term if prices were adjusted upward.”

However, the IMF itself recognizes the downside of such policy recommendations. It admits that an increase in energy prices would have an adverse impact on poor and vulnerable groups, and as such “compensatory measures” would need to be put in place. Similarly, energy-intensive industries would need time to adjust their production and cost structures to remain competitive.

Qualifying its own advice of allowing energy prices to rise, the IMF further argues that “International experience with energy price reform suggests that such a policy adjustment will need to be well-planned, phased-in gradually over time, and clearly explained and communicated to the population and businesses.”

With all these qualifications, it is clear that one could not rely on the price mechanism, no matter how appealing to traditional economists, to solve the problem of rising energy consumption. It is one of the tools, gradually and at a later stage.

There is a more direct way of addressing the problem, without resorting to the price mechanism, by tackling the main sources of energy misuse or abuse, through a mix of incentives, awareness-raising and changes in regulations, it seeks to change patterns of energy consumption to make them more energy-efficient.

During 2012, Saudi Arabia consumed daily about 4.3 barrels of oil and equivalents. Energy production accounted for about half of that total. The Saudi Center for Energy Efficiency (SCEE) found out that buildings consume about 80 percent of all electricity produced in the country, and about 50 percent of which for air-conditioning. During the summer months, according to the Saudi minister of water and electricity, air conditioning consumes over 80 percent of electricity.

It is also true that about 70 percent of all buildings are not insulated. Building codes are largely not binding when it comes to insulation and there is very little capacity to enforce them anyway. Most air-conditioning equipment in the market was found to be inefficient, which was true for most electric appliances.

From those findings we can see that energy consumption could be dramatically reduced with improved building insulation and appliance efficiency. However, you need incentives to make it happen:

First, efficiency standards for insulation and electric appliances need to be raised by law.

Second, a voucher system could be devised to reward real estate developers and homeowners who insulate their buildings according to the new standards.

Third, prices of insulation materials could also be supported, as well as energy-efficient appliances. Price support could include redeemable coupons that vary according to the efficiency rating of an appliance.

Over time, consumers will notice the savings they make when they better insulate their houses and use efficient appliances and the financial incentive scheme could be discontinued.

A similar scheme could be used to wean electricity producers from cheap fuel. As we saw in this example, while the IMF correctly diagnosed increased energy consumption as a serious problem for GCC economies, it failed to come up with the right advice. Instinctively, it advocated raising prices to solve the problem, despite its recognition that such drastic prescription could wreak havoc economically and socially. But looked at from a GCC perspective, we were able to come up with solutions that avoid those incalculable dislocations.

To paraphrase a famous economist, sometimes when it comes to IMF recommendations: Respect them yes, but obey them not!

Email: [email protected]