Energy subsidies have led to massive energy waste in Gulf Cooperation Council (GCC) countries, according to Mohammed bin Hamad al-Rumhy, Oman’s Oil and Gas Minister. Speaking at the Abu Dhabi International Petroleum Exhibition and Conference on Sunday, al-Rumhy stated that energy subsidies in the region are unsustainable in the long-term and pose a significant threat to GCC economies.
"What is really destroying us right now is subsidies ... We simply need to raise the price of petrol and electricity. In some countries in our region electricity is free and you leave your air conditioning for the whole summer when you go on holiday. That is really a crime," al-Rumhy said, “so you need to send a signal to the pockets of the public."
Source: EIA
Subsidized energy is causing demand within the GCC to balloon far faster than the global average. The region has seen natural gas consumption rise by 722% compared to a global average of 124%, and oil consumption rise by 405% compared to a global average of 41%. This energy demand growth has been fueled primarily by increased demand for transportation, electricity, and desalination in a region with very little fresh water.
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These countries are some of the largest energy exporters in the world and contribute needed liquidity to global markets. They also depend heavily on energy exports as a source of government revenue to fund the region’s generous social spending programs. However, these subsidies are causing domestic energy demand to rise too quickly, eating away simultaneously at both the primary source of government revenue and available state funds.
One can look to Saudi Arabia, the largest oil producer in the region, as a case study of this phenomenon. Saudi Arabia’s oil consumption has risen 369% since 1980 to approximately three million barrels per day, eating into its oil exports. While some of this rise is due to economic development and a growing population, Saudi Arabia also uses oil to generate the majority of its electricity. The EIA estimates that in peak summer months, when electricity demand for air conditioning is highest, Saudi Arabia burns more than one million barrels of oil per day to generate power.
Source: EIA
Like other countries in the region, the Saudi state depends on oil export revenues for almost the entirety—over 90%—of its budgetary needs. Khalid al-Falih, CEO of Saudi Aramco, has warned that if current trends continue, Saudi Arabian domestic oil consumption is “on a pace to reach over 8 million bbl/d (oil equivalent) by 2030.” This would drastically reduce the availability of oil for export and put tremendous fiscal pressure on the Saudi government.
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Furthermore, this trend is not isolated to Saudi Arabia—IHS conservatively estimates that GCC oil and natural gas demand will grow over 50% by 2030, to 6.2 million barrels and 400 billion cubic meters per day of oil and natural gas, respectively. Solar and nuclear power plants are being considered as a means of shifting electricity generation away from oil and gas, but this will only serve as a temporary measure as it does little to flatten steep demand growth. A reduction in energy subsidies in the long-term is required to communicate the true cost of consumption to GCC populations.
Whether or not the GCC will actually raise energy prices is a different story. The GCC embarked on large social spending programs in the wake of the 2011 Arab Spring in the hopes of stemming the tide of revolutionary fervor sweeping through the region; cutting subsidies and raising energy prices now would undo much of the goodwill that has been gained. A difficult political decision is inevitable at this point—either GCC governments must address the unsustainability of energy subsidies now, or they will face certain fiscal hardship in the future.
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For the sake of global energy markets, let’s hope they choose the former.
By. Rory Johnston
