Low fossil-fuel prices are responsible for wasteful consumption in the countries of the Gulf Cooperation Council (GCC), said Al Mazroui, Minister of Energy of the United Arab Emirates, and Al Rumhy, Minister of Oil and Gas of Oman at the Abu Dhabi International Petroleum Exhibition and Conference on November 10, 2013.

Al Mazroui framed the problem as one of setting low energy prices. Even though the UAE has among the highest transport fuel prices in the GCC, low pricing is still a heavy fiscal burden. Gulfnews.com reportedthat Al Rhumy noted that subsidies were the main problem and that consumers were benefiting from them dis-proportionally by purchasing fuel inefficient vehicles.

Low fossil-fuel pricing is a politically sensitive topic in the GCC, where cheap energy has been a means to redistribute resource wealth among the citizens. In addition, fuel prices are important for economic reasons; while GCC economies are not only very energy intensive, energy intensity per unit of GDP has been increasing over time in some GCC countries.

The IEA and IMF have estimated fossil fuel subsidies in the GCC region to be around US$56 billion in 2011. The IISD Global Subsidies Initiative has found that most subsidies go to transport fuels: gasoline was subsidized at around US$20 billion, and diesel supported to the tune of US$31 billion, of which a bit more than half was allocated to diesel in transport and the other half to diesel for electricity generation.

In Oman, almost all subsidies are going to gasoline in the transport sector. The subsidy there has increased from around US$300 million in 2006 to US$1.2 billion in 2012. In the UAE, subsidies to gasoline and diesel reached respectively US$900 million and US$1.6 billion in 2012. Together, this represented a 420% increase from 2006 levels. This is putting increasing pressure on the fiscal health of GCC countries.[1]

Al Rumhy commented that oil prices would have to increase for local consumers. While this is certainly correct to achieve fiscal breathing space, fuel pricing reform has proven to be a difficult undertaking in many countries.

Fossil-fuel subsidy reform is a difficult progress in which full engagement and collaboration can achieve results that are beneficial for countries’ budgets as well as their economies. The GSI has developed a guidebook for reform in South East Asia and is currently increasing its work in the MENA region.

[1] GSI used price-gap calculations that estimate the foregone government revenue of selling fuel domestically at prices below international market prices. These are thus calculations based on an opportunity cost estimation, rather than based on the cost of production, which is lower in GCC countries. Insufficient data was available to calculate production cost-based estimations. A discussion on methodology and subsidy estimation results will be published in a GSI report early 2014.