The cost of domestic energy prices to Saudi Arabia

The issue of subsidies on domestic energy prices has moved up the policy agenda, most recently as a result of the G20 commitment in September 2009 to phase out such subsidies. However, what constitutes a “subsidy” is complex and controversial. The IEA in its last World Energy Outlook claimed that Saudi Arabia was second in the world in terms of its levels of subsidy on domestic energy prices. However, because Saudi Arabia is a price maker in the international oil market, the methodology used by the IEA is seriously flawed. This paper explains the problems with the methodology for computing subsidies and explains the correct method in the case of Saudi Arabia. It then attempts to measure the levels of subsidy in Saudi Arabia using this methodology. However, while it converts the IEA's “subsidy” of $23 billion into a net “profit” of $5.7 billion, it goes on to point out that the current low price regime is causing problems for Saudi Arabia.

► How to define energy subsidies in the context of Saudi Arabia as the price maker for international oil prices?
► How far do the low domestic energy price in Saudi Arabia represent subsidized prices?
► What are the costs and benefits of low/subsidized domestic energy prices in Saudi Arabia?
► What policy options are available to offset the very poor record of energy efficiency in Saudi Arabia?