Suggestion of lifting oil subsidies in Saudi Arabia surfaces during conference

Published May 8th, 2013 - 10:10 GMT
Rationalization of subsidies, particularly on fuels for non-targeted participants is needed to improve Saudi productivity
Rationalization of subsidies, particularly on fuels for non-targeted participants is needed to improve Saudi productivity

Saudi Arabia should cut energy subsidies that are burdening public finances, the economy minister and the head of the state-run utility said, a move that would also tackle the issue of erosion of crude exports.

Rock-bottom prices for gas, power and gasoline have turned the world’s 20th biggest economy into its sixth-biggest consumer of oil, producing less than $3.70 of economic output for every kilogram of oil equivalent that it used in 2010, compared with the global average of $6.20, according to World Bank data.

“This has become an increasingly important issue as these subsidies have become increasingly distorting to our economy. This is something we are trying to address,” Economy and Planning Minister Mohammed Al-Jasser said yesterday.

“Rationalization of subsidies, particularly on fuels for non-targeted participants”, is needed to improve Saudi productivity, he told a financial conference in Riyadh.

Jasser did not give details of how Riyadh would tackle fuel subsidies. Saudi Arabia keeps its domestic energy prices low for everyone, regardless of income levels, paying the subsidies out of the hundreds of billions of dollars that the kingdom makes from exporting crude oil.

This practice limits the potential long-term returns from oil exports. Nearly 40 percent of Saudi electricity is still produced by burning oil.

Energy-hungry industry has boomed over the past decade, thanks to energy costs that are a fraction of those in most countries. This growth increases the cost burden on state-run companies that supply fuel, power and gas.

“Subsidy is becoming a big part of the government budget … Subsidy should be revised and done in a different way.

It should be smarter and support low income people,” state-run Saudi Electricity Co Chief Executive Ali al-Barrak said.

Jasser also said Saudi Arabia should also resolve imbalances in its labour market, including the low level of private-sector employment among Saudi citizens, particularly women.

He said it was important for the country to diversify its economic base and develop more medium-sized companies.

There has been talk before about raising low fuel prices, including domestic natural gas prices, for years, but there is no clear sign that it will happen.

The government is wary of provoking social unrest by hiking gasoline or power prices, especially since the Arab Spring, or of scaring off gas-hungry industries that create jobs for a youthful population.

Reducing subsidies available to higher income groups while maintaining cheap power supplies for millions of Saudis who are relatively poor could help lighten the burden on Riyadh without sparking unrest.

“Over the last two years we have seen a real debate happening in government and among the wider public, so that’s a definite step forward,” John Sfakianakis, chief investment strategist at Masic in Saudi Arabia, said. “But now we need to look at how this can be addressed in terms of actual decisions 

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