Saudi energy price reform posing challenge: APICORP

APICORP EnergyThe Arab Petroleum Investments Corporation (APICORP) has released the February issue of its monthly energy commentary, focusing on the major issues and trends shaping the energy landscape in the Middle East and North Africa

The research entitled ‘Saudi energy price reform getting serious’ is primarily aimed at energy professionals in the private and public sectors and the wider finance community.

The Saudi government aims to continue its energy pricing reform plans. In January 2018, the government introduced another significant increase in gasoline and electricity prices. The prices of high and low-grade gasoline rose from US$0.24/litre to US$0.54/litre and US$0.20/litre to US$0.37/litre.

The widening gap between the two grades of gasoline is expected to push more consumers to the low grade. On the other hand, diesel prices for transportation remained unchanged, resulting in a huge discrepancy between gasoline and diesel prices.

As for electricity, prices for the for low consumption brackets rose sharply from US$0.01/kWh to US$0.05/kWh for residential consumption. Residential consumption levels above 6,000kWh/month remained at US$0.08/kWh. The increases did not affect government and commercial sectors.

The main variables that determine the amount families receive are its size, income and age of family members. The government is also looking at factors such as the additional cost that families will incur from the price hikes, as well as other costs associated with government efforts to increase non-oil revenues such as VAT.

According to APICORP, as the reform programme enters its second phase, several challenges are appearing which need to be addressed.

“First, higher energy prices will have a direct impact on households as fuel and electricity enter into their consumption basket. There are also the indirect effects, such as higher energy and electricity prices feeding into the costs of other goods and services, which rely on fuel for production and transportation,” said the report.

“Second, unlike the first round of reform, the cash transfer programme was introduced to offset the impact of increases in energy prices on poor households. Implementation of the programme was challenging despite the government managing to obtain information and identify eligible recipients. It will need to continue to ensure that it is able to include and identify all eligible households.”

“Third, the amount of money transferred was not enough to fully offset the direct and indirect impact which created social media backlash. As a result, the government announced handouts which were higher than the money devoted to the Citizen’s Account in the first place.”

“Fourth, unlike the first round of reforms that affected all fuels, the increase this time only affected the gasoline and electricity prices. Currently, the price differential between gasoline and diesel is too high and it is only a matter of time before the government has to adjust diesel prices as well.”

According to APICORP, the initial reforms in late 2015 were well received, mainly because prices still remained very low. The current phase is going to prove more challenging, but ultimately more rewarding in terms of real benefits to government finances and the long-term health of the economy.

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