Rationalizing Energy Consumption in Saudi Arabia towards an Energy-efficient, Green Economy

Bukhari Sillah, Abu Camara

19 Oct, 2023

Introduction

On 28^th August 2023, a Bloomberg article reported that energy subsidies in Saudi Arabia amounted to US$7,000 per capita on energy subsidies – the highest among the Group of 20 Economies

The portrayal of energy subsidies in Saudi Arabia needs to be put in perspective. This blog examines the subsidy issue more comprehensively and explores some key initiatives undertaken by the Kingdom of Saudi Arabia to rationalize energy consumption towards a sustainable energy-efficient economy.

Contextualizing Energy Subsidy in Saudi Arabia

Saudi Arabia has set out on an ambitious transformational agenda since 2017 to diversify its sources of growth and wean itself gradually from oil dependency. Tarshid company is one such initiative that is mandated to steer green and energy-efficient growth and contribute to sustainable development. Clean and renewable energy started featuring prominently on the country’s development agenda. Saudi Arabia’s efforts to this end have started bearing fruits, evident in the increased generation of renewable energy from 0.07 terawatt-hours in 2017 to 0.16 terawatt-hours in 2018 (Table 1) along with a decline in energy consumption per capita and. The country has vast solar and wind power potential that could accelerate renewables production. In 2022, its generation of renewable energy reached 0.84 terawatt-hours. In comparison, this is higher than that of Qatar (0.54 terawatt-hours), and Kuwait (0.21 terawatt-hours); but less than that of Oman (1.58 terawatt-hours) and UAE (6.96 terawatt-hours).

Before the establishment of the Tarshid company, the Saudi Council of Ministers created the Energy Efficiency Center in King Abdul Aziz City for Science and Technology (KACST) in 2010. The Center was tasked with developing energy efficiency and conservation policies targeting all sectors. These initiatives have improved minimum energy performance standards and consumption in the Kingdom. For example, from 2012 to 2020, energy intensity levels in the industry decreased by around 4%, home and street lighting consumption decreased by 80%, and fuel economy in the transportation sector improved by 16%. Moreover, the program introduced vehicle energy efficiency labels for light-duty vehicles (LDH) in 2014 and was updated in 2018 to include electric vehicles. The Kingdom aims to have at least 30% electric vehicles in Riyadh by 2030 and to produce and export 150,000 electric vehicles per year with electric vehicle manufacturers, Lucid. The drive for renewable energy and a greener future has been further catalyzed by the Kingdom’s NEOM city, which is expected to boast of NEOM Hydrogen Company (NHGC), integrating 4 gigawatts of onshore solar and wind energy to generate up to 600 tons of green hydrogen per day. Rationalizing energy consumption and moving towards an energy-efficient economy has also impacted the fuel subsidy in Saudi Arabia.

Energy Subsidies in Perspective

Energy subsidies consist of implicit and explicit subsidies. Implicit subsidies are charges for environmental damages coming from global warming, local air pollution, and vehicle externalities. Explicit subsidies are the opportunity cost for selling the fuel below its supply cost. The supply cost is defined as the export price for fuel-exporting countries and the import price for fuel-importing countries. While this methodology for calculating subsidies is important for global comparisons, it fails to account for country-specific nuances as such, it needs to be contextualized.

Explicit fuel subsidies trended downward, while the implicit fuel subsidy remained almost unchanged between 2017 and 2020. The downward trend was disrupted by inflation hikes and energy price spikes from the end of 2021 to 2022. In 2022, the total fuel subsidy equals 27% of the country’s GDP (US$252.83 billion). The implicit subsidies constitute 48.8% of the total subsidies, while the explicit subsidies are 51.2% of the total subsidy. There is a significant jump in the subsidy amount in 2022, from US$4,630 per capita in 2021 to US$6,996 per capita in 2022, driven by the spike in oil prices in the wake of the East European Crisis. While implicit subsidies remain largely stable over time (because they are based on environmental damages), explicit subsidies are highly volatile, depending largely on the export price of oil and gas. With oil prices projected to decline in the future, explicit subsidies are expected to diminish.

Instead of using the export price of fuel as the supply cost, in the case of Saudi Arabia, either the fiscal breakeven oil price or the production cost of oil could be used given that it has underutilized production capacity. Taking the production cost of US$10 per crude barrel and converting it into US$ per litre, results in US$0.063/litre oil production cost. In local currency terms, Saudi Arabia’s production cost is SAR 0.24/litre. This is much lower than the pump prices of oil in the Kingdom. Thus, it could be argued that Saudi Arabia faces no opportunity cost (economic loss) when selling oil locally based on production costs.

In addition, it may be noted that a significant portion of the subsidies is for natural gas (US$70 billion), other oil fuel (US$66 billion), and electricity (US$9 billion) (Table 2). If we assume that fuel and electricity subsidies benefit households, then the per capita benefit to households of explicit subsidies amounts to US$2,611 for these components. Finally, the opportunity cost defined by the IMF is purely market-based, which fails to consider the social opportunity cost of raising pump prices, and the negative other socioeconomic impact that could arise from energy-induced inflation.

Table 2: Breakdown of subsidies – Saudi Arabia, 2022

Conclusion

Saudi Arabia has embarked on an ambitious transformational reform agenda to change its growth gears from public-led to private-led since launching its Vision 2030. The transition towards green, resilient, and sustainable growth is a key objective of the Vision. The initiatives being implemented have improved minimum energy performance standards and consumption in the Kingdom, and renewable energy generation is expected to increase exponentially. Likewise, the energy subsidy has been falling since 2017 in the wake of the unveiling of Vision 2030. Thus, it could be argued that Saudi Arabia may not incur an opportunity cost of selling domestically because its consumer prices cover its production costs and not supply costs (export price), and as such no real subsidies on crude oil-related products.