Saudi Energy Subsidies “Causing Enormous Damage” To Economy, Warns Minister

May 8, 2013Saudi Arabiaby EW News Desk Team

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The Saudi Arabian government may cut its fuel and electricity subsidies for consumers as a measure to ease the burden on the economy, hinted a top finance official on Tuesday, after the cost of energy subsidies rose to about one-fifth of Saudi Arabia’s GDP in 2011.

At the annual Euromoney conference in Riyadh, Economy and Planning Minister Mohammed al Jasser said that the government was looking to save some tens of billions of dollars spent annually for energy subsidies; and claimed that the wasteful of energy among the rich, in particular, was affecting the nation’s productivity.

“The subsidies have become exorbitantly expensive and causing enormous damage to the economic system. Therefore, the Kingdom is seeking to address this problem in a careful and balanced way with extra keenness and caution,” he said in a speech, as cited by the Saudi Gazette.

“Rationalization of subsidies, particularly on fuels for non-targeted participants,” is a big factor hindering productivity, he added, according to Reuters, making veiled criticism of the way fuel subsidies were being paid indiscriminately at present, with wealthy individuals running many vehicles on gas costing less than $0.50 a gallon.

The chief executive of Saudi Electricity Co, the country's majority state-owned power utility, Ali al-Barrak, echoed al Jasser’s remarks, calling for all government subsidies to be “revised.”

"Subsidies are becoming a big part of the government budget," al-Barrak said. "Subsidies should be revised and done in a different way. They should be smarter and support the low-income people."

According to the IMF, the countries of the Middle East and North Africa together account for about half of the $480 billion spent on energy subsidies by governments globally. Individually, Saudi Arabia used up more than 750,000 barrels a day of crude oil to meet its domestic energy demand last summer, hurting exports and increasing the government’s budget.

But any changes to the subsidy system is a politically sensitive issue in Saudi Arabia, where citizens expect handouts from the government and much industry is built on ultra-cheap industrial gas prices. Al-Jasser’s comments was not the first time a Saudi Arabian minister has hinted at a subsidy cut, but there has been no clear sign of any for years.

John Sfakianakis, a chief investment strategist at Masic in Saudi Arabia, however told Reuters that the Saudi government had been noticeably ramping up its rhetoric in cutting subsidies for the past two years.

“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,” Sfakianakis said.

“The price of electricity, the price of gasoline, the price of water have to change…But now we need to look at how this can be addressed in terms of actual decisions,” he added.

Government expenditure as a percentage of GDP in Saudi Arabia rose from 29 percent in 2006 to 36 percent in 2012, even as GDP has expanded dramatically. Last year, a Citigroup report predicted that the Kingdom may become a net oil importer by 2030, with its per capita consumption now among the highest in the world.

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“If Saudi Arabian oil consumption grows in line with peak power demand, the country could be a net oil importer by 2030,” wrote Citigroup analyst Heidy Rehman.

“Indeed we would expect consumption to continue to outstrip population growth as Saudi Arabia’s currently young population ages and consumer spending increases supported by rising GDP per capita,” he added.

“As a result of its subsidies we calculate ‘lost’ oil and gas revenues to Saudi Arabia in 2011 to be over $80 billion,” Rehman further wrote.

“At the domestic level, we believe the only real way to rationalize energy consumption would be to reduce subsidy levels,” he noted at the time.

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