Saudi Arabia’s Energy Pricing Reform in a Changing Domestic and Global Context

It is often implied that economic adjustments and structural reforms are very difficult in the context of rentier economies. Yet recent experience shows that in response to the declines in oil price and uncertainties surrounding oil markets, GCC countries have been able to introduce some limited reforms with relative ease and, so far, without much public opposition. Perhaps most visible are the recent energy price increases in Saudi Arabia. While low energy prices are associated with wide distortions, inefficiencies and inequities, increasing domestic energy prices without introducing compensation measures has both direct and indirect adverse impacts on households’ welfare. In Saudi Arabia, low energy prices have another dimension, as they have been central to the country’s industrialization strategy, which is based on the competitiveness of energy intensive industries such as petrochemicals, aluminum and steel. In this presentation given at the Oxford Centre for Islamic Studies, Bassam Fattouh addresses the following key questions:

  •  How deep have the recent energy price increases in Saudi Arabia been?
  • Can these reforms be accelerated without the government facing serious public opposition? What are some of the policies that governments can pursue to increase the acceptability of energy price reforms?
  • Will energy price reforms reverse the long-term industrialization strategy based on developing energy intensive industries?
  • Can energy price reforms (and economic reforms more generally) be implemented without greater accountability and openness?

The presentation addresses these questions in the context of changing international and domestic scenes and makes the following observations. First, the sustainability of energy pricing reforms is highly dependent on developing effective social safety nets and cash transfer schemes, which in turn depends on the quality of the implementation of these schemes and the institutions involved. Second, the energy sector will continue to play a key role in the Saudi economy and therefore energy intensive industries are key in shaping the energy pricing reform agenda going forward, with the price of industrial fuels expected to rise gradually and to levels that ensure industrial competitiveness.  Finally, the relationship between economic and political opening is complex: economic reform may not necessarily bring political reform; and social openness is not necessarily a substitute for successful economic reforms which are needed to generate wealth and jobs for young people, the new power base for the new leadership.

By: Bassam Fattouh