How Saudi Arabia could end up importing oil

I was somehow surprised when Saudi Arabia’s Economy and Planning Minister Mohammed al-Jasser announced last week that their rock-bottom fuel prices, some of the lowest in the world, are after all a serious problem that needs to be dealt with. “This has become an increasingly important issue as these subsidies have become increasingly distorting to our economy. This is something we are trying to address,” is what he said at a financial conference in Riyadh, and implicitly referred to a looming economic and energy crisis if Saudi Arabia does not change its direction soon.

A first sign of this problem already emerged in 2009 when Glada Lahn and Paul Stevens from Chatham House released a report in which they estimate that Saudi Arabia could become a net importer by 2038 and face a serious fiscal deficit in less than 10 years, if it doesn’t handle its sumptuous oil reserves more carefully. This is because, as it stands, Saudi Arabia does not only consumes over one quarter of its own oil production, but is also one of the highest consumers of fossil fuels world-wide (consuming even more than the US per capita and the same amount as the UK although having only half the size of its population). And shockingly enough, in the days of photovoltaic the country still burns a big chunk of its oil to produce electricity – alone 40 percent of its electricity is produced by burning oil.

Despite these increasing signs of a crude awakening, Saudi Arabia hasn`t really acted yet and might take a long time to do so. Instead rulers have twiddled their thumbs and did the easiest they could do – they responded with more supply instead of demand reducing incentives, such as reforming subsidies. And ironically enough, while admitting that fossil fuel subsidies are now a problem, the country was not even willing to admit that it had any subsidies under the G20 reporting mechanism.

So why should it reform its subsidies exactly now and how should it go about it? On the international stage, the time for subsidy reforms could not be better. The G20 has called for energy subsidy reforms for long enough and the IMF has just released a report multiplying the level of estimated fossil-fuel subsidies world-wide and setting a determined sign to end unreasonably cheap oil. On the other hand, there are only a few examples like Iran in which reforms have been successful while a large number failed as sharp price hikes were met with angry protests ending attempts in Nigeria and Jordan just last year.

The problem that Saudi Arabia shares with these countries is that subsidies have been one of the main means through which they have managed to form a social contract with their citizenries. Yet, on top of that Saudi Arabia’s subsidy problem has been amplified by an incredibly young population, without jobs and future in a highly undiversified economy, an explosive basis for Arab-spring-type revolts against any such type of reform. About 64 percent of its population is under 30 years and face an unemployment rate of 27 percent rising to 39 percent for the 20 to 24 year olds. That’s what possibly scared off the government for long enough to change the status quo, apart from the fact that also powerful commercial and industrial entities benefit from these low prices that increase profits, particularly for exports, as the Chatham House report states.

While the government hasn’t got any official plan about how to deal with the subsidy issue yet (surprisingly), most studies, like the recent one by the IMF, suggest that fossil-fuel subsidies should be reformed with the help of targeted cash transfers or should, at least guarantee that fuel subsidies are more targeted to the poor who really need them. But how do you determine who should get cheap fuel or a targeted cash transfer and who not in a system that is already, sorry to say that, very corrupted?

It ends up with the same reform suggestion. The best would be a universal targeted cash transfer as outlined here.

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