Saudi Arabia starts new round of effort to unwind subsidies

Saudi Arabia recently took the second step in its delicate unwinding of consumption subsidies for necessities such as energy and water.

The first step, reports the Arab Petroleum Investment Corp. (APICORP), went well.

Prices rose in 2016 for natural gas, ethane, high-grade gasoline, low-grade gasoline, diesel for transport, diesel for industry, Arab Light crude, Arab Heavy crude, and kerosene.

The increases ranged from 12% for kerosene to 133% for ethane.

For consumer products, the initial price jumps were 50% for high-grade gasoline, 67% for low-grade gasoline, and 79% for transport diesel.

Still, prices for gasoline and diesel remained low by world standards. Electricity prices rose by as much as 150% for large consumers.

APICORP points out that many Saudi motorists blunted the gasoline blow by switching to lower-octane product.

“The hikes were generally accepted by the public, and overall the first phase of energy price increases has been successful without the government needing to publicize the reforms or introduce compensatory schemes,” APICORP says.

Energy demand declined in 2016, helped by a slowdown in economic growth. The government’s spending on subsidies, about $80 billion in 2015, fell in 2016 by $7.7 billion.

Last month, the government introduced a second round of price increases—but only for gasoline, industrial diesel, and electricity for low-use customers.

The new gasoline price hikes are 127% for high-grade and 83% for low-grade.

For the second round, the government introduced a cash-transfer program to ease pain of low and middle-income Saudi households. It expects to disburse $8 billion this year.

Remaining challenges, APICORP says, are possible economic damage including inflation, management of the cash-transfer program, a gasoline-diesel price discrepancy, and uneven treatment of industrial and individual consumers.

The group credits the government for not backtracking under pressure of social-media gripes while still accommodating public concerns.

Saudi economic reform is essential, of course. But it’s politically precarious. Working in a market justifiably reactive to any sign of Saudi instability, the oil industry must hope Riyadh gets it right.

(From the subscription area of www.ogj.com, posted Feb. 9, 2018; author’s e-mail: [email protected])