Saudi Arabia, UAE lead GCC subsidy reform

Saudi Arabia and the United Arab Emirates lead the Gulf Cooperation Council in raising energy prices and cutting subsidies in response to fiscal pressures created by the slump in crude oil prices, according to Arab Petroleum Investments Corp. (APICORP), Dammam, Saudi Arabia.

While welcoming the trend as “a step in the right direction, APICORP warns, in a review of reforms introduced so far, that “the path for energy-pricing reform will be long and fraught with risks.”

Increases in energy prices traditionally kept low by governments reduce household welfare and increase input costs of industries, the group notes. It urged governments to adopt mitigation policies such as compensation for households, especially those with low incomes, and technical assistance and loans to help industries adjust.

“It is the ability of the GCC governments to put in place such schemes and communicate their policies effectively and transparently that will determine the success of their energy-pricing reform programs in the longer term,” APICORP says.

Among steps taken by GCC members so far:

Saudi Arabia announced in December a 5-year plan to raise prices of fuels including natural gas, gasoline, diesel, and electricity along with water (OGJ Online, Dec. 29, 2015). Highest increments are 133% for ethane, 79% for transport diesel, and 67% each for natural gas and low-grade gasoline. Prices of electricity also will rise by varying amounts except for households with low usage levels.

The UAE last July started a program under which prices of gasoline and diesel remain administered by the government but are newly allowed to align with international levels (OGJ Online, July 22, 2015). APICORP notes that gasoline prices in the federation already were near global levels and therefore haven’t risen much and that diesel prices recently have fallen. UAE electricity reforms apply mainly to expatriates. Natural gas, accounting for most UAE subsidies, remain subsidized. “Compared to Saudi Arabia, therefore, the breadth of the UAE’s reforms has been limited, while sharp increases are needed to bring local Saudi prices closer to international levels.”

• Although Kuwait occupies a better financial position than some of its GCC neighbors, the emirate is trying to trim spending and balance its budget. Subsidy reductions represent most of a 20.7% spending cut in the 2015-16 budget as the government tries to lower the cost of subsidies by nearly 35% from $19 billion in 2014-15. But parliamentary pressure blunted an attempt to raise diesel and kerosene prices last year.

Oman plans to increase income taxes on businesses and bring all companies under the tax regime and to cut subsidies in an effort to reduce spending by 11%. The budgeted 64% cut in subsidies for petroleum products, electricity, and other goods, APICORP says, “requires sharp rises in energy prices across the board.” Oman last year doubled gas tariffs for industrial producers and the power industry.

Bahrain raised gas prices to industrial users by 11% last April and plans phased increases that will take the gas price to $4/MMbtu in 2022. In 2013 the government announced a program of phased increases in the price of diesel but backed away from it when the parliament resisted. A new attempt to raise prices gradually of diesel and kerosene is under way.

Qatar follows what APICORP describes as “an ad hoc approach to its energy-price increases.” The government last increased gasoline and diesel prices in 2011 and raised electricity and water charges last October. The 2016 budget includes a 7.3% spending cut, mostly from education and with the projected deficit to be funded by international borrowing.

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