Domestic energy pricing and energy

demand in the GCC

Laura El-Katiri

OIES GCC ENERGY DAYOXFORD, 24 OCTOBER 2014

Research Fellow, Oxford Institute for Energy Studies

Why think about domestic energy pricing in the

GCC states?

GCC domestic energy prices are amongst lowest in the world

0 0.5 1 1.5 2 2.5 3

Libya

Saudi Arabia

Kuwait

Bahrain

Qatar

GCC (median)

Oman

Iran

Egypt

UAE

US

North America

Latin America

EU

Germany

Japan

UK

Norway

Turkey

US$ per liter0 5 10 15 20 25

Kuwait

Bahrain

Iraq

Saudi Arabia

Egypt

GCC (Median)

Qatar

Oman

UAE

US

Norway

Turkey

UK

IEA members (Median)

EU 15 (Median)

Japan

Germany

US¢/kWh

Electricity (retail average), 2012 Gasoline (pump price), 2012

Source: World BankSource: AUPTDE, EIA, others

These prices have many unintended consequences…

0

100

200

300

400

500

600

2000 2002 2004 2006 2008 2010 2012 2014 2016 2018

kto

e

Kuwait Oman

Qatar Saudi Arabia

United Arab Emirates

0 5,000 10,000 15,000 20,000

Latin America

Iran

UK

EU

Japan

Germany

Norway

Saudi Arabia

US

North America

Canada

Bahrain

UAE

Oman

Kuwait

Qatar

kg of oil equivalent per capita

GCC energy demand has grown quickly and continues to grow…

Per capita energy consumption

1. Energy consumption

Source: EIU Source: World Bank

0%

5%

10%

15%

20%

25%

30%

1980 1990 2000 2010 2013

Saudi Arabia Kuwait

0%

20%

40%

60%

80%

100%

120%

140%

1980 2000 2010 2012

Saudi Arabia Kuwait

Rising domestic energy demand is a LT problem…

Domestic consumption as a share of gross marketed production

Oil Natural Gas

Net-import needs

Source: Author based on EIA dataSource: Author based on EIA data

…and is wasteful from a resource perspective

0

100

200

300

400

500

600

700

800

900

Crude burn in power generation in Saudi Arabia, April 2012 – April 2014

Source: JODI Data

2. GCC sources of energy

0

10

20

30

40

50

60

70

80

90

100

Latin America�Europe &

Central Asia�Sub-Saharan

Africa North America South Asia�East Asia &

Pacific�MENA

Pe

rce

nta

ge

Oil Natural Gas Coal Nuclear Renewables (Hydro) Renewables (non-Hydro)

0 50 100 150 200

UK

Norway

Egypt

Iraq

Germany

Latin Americ

EU

Japan

Kuwait

Qatar

UAE

Saudi Arabia

US

North America

Iran

Oman

Bahrain

kg of oil equivalent per $1,000 GDP (constant 2011 PPP) -0.03

-0.025

-0.02

-0.015

-0.01

-0.005

0

0.005

0.01

0.015

0.02

0.025

1985 - 1990 1990 - 1995 1995 - 2000

2000-2005 2005 - 2010

Asi

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Eura

sia

Lat.

Am

eric

a

Mid

dle

Eas

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No

rth

Am

eric

a

Sou

th A

sia

Sub

-Sah

aran

Afr

ica

3. Energy intensity of the economy

Source: World BankSource: World Bank

0

10

20

30

40

50

60

met

ric

ton

s p

er

cap

ita

4. CO2 emissions

So why keep things this way?

• Large industries, particularly energy-intensive industries

Fulfill a key strategic role as intermediate producers for the export market

• Middle and high income households (“urban middle class”)

Most international studies show that these are the primary beneficiaries of energy subsidies as they consume proportionally more energy than the poor

i.e. households able to afford cars, large homes, high-tech usage (air con, computers, TVs etc.)

The beneficiaries of current pricing policies

• Small and medium firms and enterprises Receive low-cost electricity but suffer from power cuts and load shedding Are often crowded out as funds and business focus flows into large,

energy-intensive industries Could benefit significantly from more equitably spent benefits that raise

spending power of households across the product range through resources currently wasted as deadweight loss under the current pricing system

• Low-income households Proportionally, these households capture least of the value of energy

subsidies because they consume proportionally less Yet, price rises would hit them hardest since small rises in overall living

costs have a large impact on their (small) disposable income Their needs would arguably be better addressed by more targeted benefits

in kind or cash

• Future generations Classical market failure problem whereby the interests of future

generations are not taken into account by the current generation

The losers of current pricing policies

• Incomplete information The economic disadvantages of current pricing policies are poorly

understood by the public, including those who would gain most from a reform

• Political mobilization bias Groups more likely to lose out from a reform will put pressure on the

government first The effect is stronger if these groups are a small, easily mobilizable

group, e.g. an industry lobby, but also the increasingly vocal urban middle class

• But… Arab Spring protests show underlying issues of social equity can stir up

tremendous domestic instability once a crisis point is reached Popular policies cannot always address these underlying issues

adequately Past reform experience in the Middle East and North Africa demonstrate

that the best time to reform domestic energy prices is before an economic crisis point is reached

The political dilemma of reforming prices…

• So far the most comprehensive reform of domestic energy prices in MENA oil & gas producers

• Iran’s opportunity cost under current pricing practices was estimated at ~ $100bn by the end 2000s – money that could be spent in other ways

• First reform step Dec. 2010 raised domestic fuel and electricity prices by between 50% (natural gas) to 900% (diesel) over night

• The reform was coupled to a compensatory “cash subsidy” scheme. Initial design:– 30% of revenue savings to be allocated through direct cash

transfers to help industries invest in energy-efficiency– 20% to be paid to public sector institutions;– 50% to be transferred to Iranian households through a universal

cash handout

Reform lessons from Iran (I)

• Iran’s subsidy reform has not come without complications – the popular cash transfer system was soon captured by political

interests– International sanctions and the depreciation of the riyal have

prevented Iran from making revenue savings in the order originally envisaged, helping render the complementary cash transfer system soon a new fiscal burden

– Further reform steps planned for Oct. 2012 were delayed until early 2014 to avoid a further spiraling out of control of domestic inflation following international sanctions against Iran

• But it has demonstrated some important points– Domestic energy price reform can be politically viable in large oil

and gas producers– Fiscal discipline and a conductive economic climate – ideally

before a crisis point is reached – are important preconditions for the success of such reform

Reform lessons from Iran (II)

• Model-based approach to compare Kuwait’s current utility pricing scheme to and alternative, where (i) consumer prices are raised to market levels and (ii) consumers are compensated on average with a cash transfer

• Costs considered: fuel + additional infrastructure

• Why a compensatory cash transfer?– Reforming domestic energy prices entails a welfare loss for

households and is politically difficult

– Cash transfers do not distort household decisions

– > The aim is to reduce waste, but not household welfare

Aim & methodology

• An adjustment of prices closer to market price level confers a benefit on current and future generations of Kuwaitis, in terms of fiscal savings, that outweighs the impact of raising electricity and water consumer prices to market price levels

• The net benefit of moving to market prices is 140 per cent of the value of the fuel input, or 6.3% of GDP – this makes a compensatory cash transfer system affordable

• A shift to market pricing will be a more efficient route to achieving spare capacity in the electricity and water system, rather than paying for additional infrastructure

Key findings

Laura El-Katiri

Research Fellow, Oxford Institute for Energy Studies

+44 (0)1865 889134

laura.elkatiri@oxfordenergy.org

Original research papers

El-Katiri, L. & Fattouh, B. (2015 forthcoming)

‘A Brief Political Economy of Energy Subsidies in the Middle East and North Africa’

Research paper, Sciences Po, Paris

Fattouh, B. & Mahadeva, L. (2014)

‘Price Reform in Kuwait’s Electricity and Water Sector: Assessing the Net Benefits in the Presence of Congestion’

OIES Paper, MEP 9, Oxford Institute for Energy Studies