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Petrol may still be cheaper than bottled water in Saudi Arabia but the hiking of fuel prices by two-thirds this week is nonetheless a radical departure in a country that for decades has traded economic handouts for political loyalty.
Saudis rushed to petrol stations across the kingdom hours after the government unveiled a radical austerity programme on Monday, hoping to fill their tanks before prices rose. Higher quality 95-octane petrol increased by 50 per cent to Sr0.90 ($0.24) and lower-quality 91 grade jumped by two-thirds to Sr0.75 a litre the following day.
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Government officials said a five-year plan to reform energy subsidies is part of a broader programme to create a more efficient, productive economy, as oil prices have hit 11-year lows and the country’s deficit ballooned to 15 per cent of GDP this year.
“This is not just about energy, it is a commitment to seize the moment and take the right decisions to change our economy,” Adel al-Fakih, economy and planning minister, told the Financial Times.
The kingdom, which is trying to reduce the budget deficit to 11 per cent next year, has also pledged to rein in public sector wages, which account for half of all budgetary spending, and is to launch a privatisation programme.
It is also planning to implement some new taxes. The finance minister, Ibrahim al-Assaf, told pan-Arab daily Al-Hayat that the government was expected to introduce a Gulf-wide sales tax of around 5 per cent within two years.
Saudi Arabia, which spent around $107bn, or 13.2 per cent of gross domestic product, on energy subsidies in 2014, is one of the world’s biggest consumers of energy, with rock-bottom prices fostering excessive consumption.
“Subsidies have long been a fiscal drag on the state and have been unreasonably high even by global standards,” said John Sfakianakis, a Riyadh-based economist. “Subsidy reform is essential if the economy is to be in turn more efficient and eventually more productive.”
But while most Saudis recognise the need to reduce consumption, many are already worried about the rising cost of living and know their pockets will be hit.
“No one is happy about these increases,” said one executive.
Ali al-Naimi, the veteran oil minister, last month raised doubts about the energy price increases, saying there was no “dire need” for the kingdom to withdraw direct assistance to its population.
Saudi social media users resorted to humour to discuss the price hikes — open dissent is avoided after a crackdown on freedom of expression in the wake of the 2011 Arab uprisings.
“Men are worried about the price of petrol,” tweeted one user. “By God, someone tell them the price of Mac rouge?”, referring to a popular makeup brand. Others circulated articles listing 18 methods to improve vehicle fuel efficiency.
Officials, keen to pre-empt any popular backlash, point out that Saudis are still paying much less than some of their other Gulf peers. In the neighbouring United Arab Emirates, for example, the price of petrol is 60 per cent higher, said Mr Fakih, who is overseeing the subsidy reform programme. The UAE, a wealthier state with more expatriates, increased the price of petrol significantly earlier this year with minimal public opposition.
Riyadh’s increase in electricity tariffs is also geared towards a minority of wealthy Saudis who consume large quantities of power. Some 87 per cent of bills will not change, Mr Fakih said.
He added that while the government will monitor the impact of the reforms, especially on inflation, for the time being there were no plans to introduce schemes to compensate poor Saudis for the higher prices.
“Only after we assess the situation will we consider our next steps,” he said. “This is just the first step; over the next few years expect more changes.”
The private sector, as well as consumers, will be hit by the subsidy reductions. Gas prices for local power generation increased on Tuesday from $0.75 per million British thermal units to $1.25 mbtu and ethane, the main feedstock for petrochemicals, rose more than 100 per cent to $1.75 per mbtu from $0.75 per mbtu.
Some investors are concerned that increasing domestic energy prices will undermine the main selling point for investors in energy-intensive industry, but analysts say the higher prices will promote efficiency.
“Businesses have to become more efficient,” said Mr Sfakianakis. “They will have to become more competitive by using technology rather simply relying on [cheap] ex-pat labour and capital.”
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