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transcript
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
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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
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800
900
Crude burn in power generation in Saudi Arabia, April 2012 – April 2014
Source: JODI Data
2. GCC sources of energy
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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
a/P
acif
ic
Eura
sia
Lat.
Am
eric
a
Mid
dle
Eas
t
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
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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