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Since the oil price drop in the summer of 2014, Gulf countries have made significant advances to reform fossil fuel prices. Besides announcing a structural overhaul of its development plans (including cultural reforms such as allowing women to drive), Saudi Arabia reformed energy prices in 2015, after United Arab Emirates (UAE) implemented two large pricing reforms earlier that year. Oman, Bahrain and Qatar implemented price increases in 2016. Some Gulf Cooperation Council (GCC) countries that implemented an automatic pricing mechanisms have regularly reviewed prices since. 

A new paper from GSI summarizes these reforms and puts them in a context of wider developmental challenges in the GCC. It also calls for more focused international support to energy pricing reforms in the Gulf region. This paper complements a number of recent publications on pricing reform in the Middle East and North Africa (MENA) region by the International Monetary Fund, Oxford Institute for Energy Studies (1, 2 and 3), and the Emirates Diplomatic Academy.

1. Energy price reforms happened because governments needed cash—full stop.

Due to the international oil price collapse that commenced in the summer of 2014, GCC countries saw a stark reduction in government revenue (on average, 10 per cent of GDP in one single year). While importing countries were reforming energy prices during the high oil price years before 2014, GCC countries were inefficiently spending record revenues.  Shortly after the price collapse, all GCC countries started running deficits. Energy pricing reforms were needed as a fiscal consolidation measure.

Chart - Transport fuel prices before and after reform

Transport fuel prices before and after reform

 2. Not all GCC countries are in the same boat: Bahrain, Oman and Saudi Arabia need deeper and faster reform (for now).

Before the price collapse in 2014, Oman and Bahrain were already in a dire fiscal situation. With a relatively larger population and a more capital-intensive foreign policy than its neighbors, Saudi Arabia also has to deal with more fiscal constraints. In 2015, the country ran a baffling deficit of USD 98 billion. While Kuwait, Qatar and the UAE were more resilient against the price collapse, they started running deficits, and Qatar and the UAE also implemented significant energy pricing reforms.

Chart - Current account balance (% of GDP)

Current account balance (% of GDP)

3. Energy pricing reform may not stick if international oil prices go up again. Low domestic prices are still a cornerstone of political stability in the GCC.

GCC countries are by no means uniform, but they do share a political model that is considered an allocation state: its people grant authorities abundant political power and control over natural resources. In exchange, the government provides for welfare via public sector jobs and in-kind benefits such as cheap energy, food and housing. Because GCC countries are energy exporters, low domestic energy prices are a part of the social contract. Increasing prices can be seen as a unilateral change of that contract. On top of that, business and political stakeholders have come to benefit off of low energy prices, making reform even more politically controversial. 

Chart - GCC transport fuel prices in comparison

GCC transport fuel prices in comparison

4. Energy price increases are only one measure; other complex structural reforms are needed to move to a more productive economy.

GCC countries have similar developmental challenges but on a vastly different scale. Overall, a large and ever-more-expensive public wage bill is crippling governments' budgets.  Public sectors are overcrowded, while private labour is mainly satisfied by migrants at uncompetitive wages. In addition to this imbalance, the public labour system is far from inclusive. It excludes female labour on a large scale and allows for rampant youth unemployment. This ticking time bomb is even worse in countries like Saudi Arabia, Bahrain and Oman, which have a growing part of the population at risk of poverty. The development plans of those countries put extra emphasis on developing private sector growth and employment. The road there, however, is long and difficult.

Chart - Percentage unemployed citizens by age group

Percentage unemployed citizens by age group

5. International support should focus on building capacity, not norms. Technical assistance can help current reforms to be successful

International support should focus on building capacity to make current reforms successful and sustainable. This means assistance from abroad should consider energy pricing reform holistically and within political constraints. To be successful, GCC countries need to innovate social safety nets and social data collection methods, design other social mitigation measures, augment statistical capacity in house, implement effective communication campaigns and address industrial competitiveness concerns. Building capacity in these areas can contribute to the success of reform packages and lay the groundwork for further reforms. For example Saudi Arabia has indicated that it will implement no further reforms before its cash transfer program is operational (its implementation is currently delayed).

On the contrary, stakeholders in GCC countries could very well consider international norm-setting efforts against fossil fuel subsidies as foreign intervention. After all, they have a comparative advantage in extracting and producing fossil fuels. Rather, assisting in the areas above and setting up regional learning platforms can create a climate of trust and more appetite for further reforms.

Allocation State

Transition Process

Productive Economy

In-kind benefits with infrequently changed ad hoc pricing

Pricing reforms (energy, food, other) & introduction of value-added & excise taxes

Market-based pricing that incentivizes responsible consumptive behaviour

Universal and untargeted transfers

Ability to collect social data & design policies accordingly

Targeted welfare subsidies and social safety nets

Mostly public employment of nationals

Labour market and immigration policy reform to “nationalize” private sector employment

Mostly private sector employment and narrowing of public-private wage gap

No or low taxation on business

Levy of corporate taxes and enhanced policies aimed at private sector

Interdependency between private sector, citizens and government

No or low taxation on income

Introduction of progressive income taxation scheme

Progressive income taxes to finance government's social responsibility

The allocation state, the productive economy and the transition process


This blog post is based on a larger research paper that can be consulted here.