Saudis may follow UAE and cut fuel subsidies

Saudi Arabia was looking more closely at cutting gasoline subsidies, a move it has been studying for years, after the United Arab Emirates did so last month, with both states trying to save money in an era of cheaper oil, a newspaper reported.

Saudi domestic gasoline prices are some of the lowest in the world. Allowing them to rise would be one of the biggest economic reforms in the country for years and a highly politically sensitive one as many Saudis rely on cheap fuel.

United Arab Emirates let gasoline prices rise 24 per cent last month.

Al Watan‘s Saturday edition quoted unnamed sources as saying Saudi Arabia cannot leave gasoline prices at ultra-low levels indefinitely because that would hurt the economy.

The newspaper did not elaborate on when the government might make a decision and gave no details on the possible reform.

However, a source in the Gulf oil industry told Reuters that Saudi officials were “seriously” thinking about reducing fuel subsidies gradually.

Riyadh would probably not act as aggressively as the UAE because of political and economic considerations, the source said. He said UAE officials had advised Riyadh to “start small”, possibly raising prices just a few per cent.

Saudi energy officials could not immediately be reached for comment.

Unleaded gasoline costs only about 15 U.S. cents per litre in Saudi Arabia, the world’s lowest price after Venezuela, according to website mytravelcost.com.

Economists estimate removing gasoline subsidies would save the kingdom nearly SAR 30bn ($8bn) annually, Al Watan reported. That would be a significant saving in a budget deficit which analysts estimate could total $120bn or more this year if crude prices stay low, slashing state revenues.

The reform could also help hold back burgeoning consumption. Domestic oil product demand rose 5.1 per cent year-on-year to a record 2.98 million barrels per day in June, according to the Joint Oil Data Initiative.

Al Watan quoted Fahad al-Anazi, deputy chairman of the economic and energy committee in the Shura Council, a top state advisory body, as saying any changes to subsidies would have to be accompanied by other measures to preserve public welfare such as providing cheaper public transport.

This implied major reform might still be years away. The government is building public transport systems but the Riyadh metro is only due to be completed in 2019, for example.

Because higher gasoline prices could fuel inflation in other goods, Anazi suggested the government might introduce new subsidies for some food and consumer items, or let poorer people keep their fuel subsidy.

Such subsidies would be provided to Saudi citizens rather than the large number of foreigners in the country, he said.