Should the GCC's new year's resolution be throwing energy subsidies out the window?
A regional review of energy subsidies is expected to result in new more cost-reflective prices. Several studies and official statements in recent times have revealed that energy subsidies in Oman and other GCC countries are driving consumers to excessive consumption and also distort energy markets, making competing alternative energy sources such as renewables appear much more expensive in comparison to highly subsidized gas and liquid fuels.
Oman’s Ministry of Information said on its website that the Sultanate is considering reducing energy subsidies. Oman has announced plans early this year to double its industrial gas price to $3 per MMBtu by 2015. Earlier, the IMF had warned that a sustainable fiscal position would be difficult to achieve without targeting generalized subsidies, particularly on fuel prices which, it noted, are “disproportionately benefiting the well-off”.
Mohammed bin Abdullah al Mahrouqi, Chairman, Public Authority for Electricity and Water (PAEW), said: “Just as the issue of resource sustainability is being scrutinized, the extent to which Oman relies on subsidized energy prices is being recognized as financially unsustainable.”
The 2013 budget included RO1.3 billion (3.3 million USD) of subsidies of which well over half, or RO740 million (1.6 million USD) relates to fuel subsidies. These subsidies distort energy markets, making competing alternative energy sources such as renewables appear much more expensive in comparison to highly subsidized gas and liquid fuels. Diesel in Oman is so cheap that trucks from the UAE drive over the border to fill up. Sudden and full rollback of subsidies is not possible. Fuel subsidies is a sensitive one for authorities for this privilege has been enjoyed by the people for long.
Subsidies have to be eased in a highly gradual and phased manner, say experts. In August 2013, a committee constituted by the Majlis Ash’shura declared that it would not recommend any repeal of government subsidies on fuel products.
According to Darwish bin Ismaeel al Balushi, Minister Responsible for Financial Affairs, RO1 billion spent on fuel subsidies could be better utilized for employment generation, training of Omanis and improving the livelihoods of nationals. Cheap fuel, he stressed, promotes consumerism and wastage of energy resources. “The objective is not to take away subsidies completely, but to ensure it goes to those sections of the population that are most deserving, he said. This means a policy of targeted subsidies to protect the poor and a gradual alignment with international fuel prices suits Oman.
Adding his voice to the debate on generalized subsidies, Dr Mohammed bin Hamad Al Rumhy, Oil and Gas Minister, said last month “subsidized petrol and electricity programs are causing a huge waste of energy across the Gulf and threatening economies.” One of the glaring examples is that top crude oil exporter Saudi Arabia is the world’s sixth biggest consumer of oil, despite being only the 20th largest economy, and GCC members are all among the least energy-efficient countries globally. PAEW is currently undertaking a wide-ranging study of energy use in Oman with a view to establishing a National Energy Strategy and appropriate energy policies to support the Sultanate’s long-term economic development. The study will examine all aspects of fuel use across the economy as well as looking for more specifically at the future use of fuels for electricity generation.
Some GCC countries are also looking at reducing subsidies on fuel, electricity and water. Fuel subsidies accelerate the depletion of natural resources, and have implications for future generations. Experts say a major review of Oman’s energy policy launched by the government is expected to address a number of far-reaching concerns, notably the current over dependence on domestic gas for electricity generation, lack of fuel diversity, barriers to the development of renewables, energy efficiency and sustainable consumption, and most importantly, the question of fuel subsidies. The over reliance on natural gas in Oman is a fact of life in that its use accounts for 97.5 percent for electricity generation and associated water production. This over dependence on a single fuel type is not a prudent step, and a review of alternatives to domestic gas is important.