Business | Analysis

GCC economies need to wean off energy subsidies

Imperative to reconsider prices in order to stop wasteful use

  • By Mohammad Al Asoomi, Special to Gulf News
  • Published: 12:36 November 20, 2013
  • Gulf News

Like economies elsewhere, turn of events impose their own agenda on GCC markets. For instance, customs duties relevant to a Gulf Common Market as well as rapid developments in the energy industry have conspired to create new conditions that cannot be ignored.

In a recent statement, Oman’s oil minister emphasised it was imperative to reconsider energy prices in the GCC in order to stop the wasteful use of energy resulting from subsidised and cheap pricing strategies and coupled to a lack of awareness about the importance of the limited — and costly — sourcing of energy.

At present, fuel prices vary significantly between GCC members, with gasoline prices differing between 60-170 fils a gallon. Also, there is a gap in diesel prices, while on electricity charges changes are subtle.

The price gap is incompatible with the planned common market, especially now that the GCC has taken practical steps to complete it. In other words, there will be repercussions on local economies if price gaps continue.

As a result of the gap, some negative trends have started to emerge, such as smuggling operations across borders, which will become difficult to curb. In fact, the GCC has considered setting a standard pricing formula that will bridge the wide gap in petrol prices in member states — a positive approach that will contribute to boosting the common market and bringing the costs of production and transport closer. A common energy pricing will also help curb smuggling operations that could damage the economies.

Despite the importance of unifying energy prices, it will not be a smooth process, as these are heavily subsidised in the six states. They strain government budgets significantly each year.


Unification of prices

For instance, Kuwait pays $16 billion a year in subsidies on goods and services. The unification of prices is vital for economic and financial reasons based on current and future circumstances.

With regard to the unification process, it can lead to higher prices if the Omani minister’s statement is correctly read and interpreted.

So, this process must be gradual and well thought out, since experience shows that prices can quickly increase even if there are no supporting reasons for the spike.

This requires the ministries of economy and trade to set regulations to control markets and prices, which should not be allowed to surpass a ceiling.

In addition, it would be imperative for the GCC to consider the possibility of giving energy allowance for citizens with low incomes, and thus make allowances for the social aspects which may arise from these increases. The current energy subsidies benefit all segments of the society, and even companies and businesses, which are already exempt from taxes.

The gradual process of unifying prices can be extended to a period of three years, until 2017, when the GCC rail network should be operational. The rail services will play a pivotal role in the movement of goods, thus reducing transport costs, which are usually the cause of high prices.

Besides, the unification of prices must coincide with an awareness campaign in all the member states to explain the importance of this step for the integration of GCC economies. It will have a bearing on energy and water saving and waste reduction as GCC economies take measures to enhance sustainable development to meet current needs and preserve the right of future generations.

It is a known fact that the rate of energy and water consumption in the GCC is among the highest in the world, not necessarily attributed to actual needs, but to the wastage by consumers. The energy and water consumption levels have become inappropriate with the economic progress achieved by the Gulf states.

This calls for the setting of more realistic energy policies and rules for energy consumption, which will provide the foundation for sustainable development in the GCC.

— Dr Mohammad Al Asoomi is a UAE economic expert and specialist in economic and social development in the UAE and the GCC countries.

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