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Baker Institute | Energy Subsidy Reform in the Persian Gulf: The End of the Big Oil Giveaway

INTRODUCTION
Many thought it could never happen. The energy subsidy reforms that have gathered pace this year in the Persian Gulf monarchies were long considered to be impossible or illegitimate, violations of a state-society “social contract” in which welfare benefits are provided by the regime to buy public support. But since Dubai’s pathbreaking reform of 2011, the old hypotheses that said Gulf energy subsidies were sacrosanct1 have been overturned by the evidence.

Energy subsidies have long outlived their usefulness. Energy products such as electricity and gasoline have been distributed domestically at low prices that, in some cases, have been fixed since the era of oil nationalization in the 1970s. Over time, government provision of cheap energy had the unintended consequence of encouraging high per capita demand. Recently governments in the Gulf monarchies have begun to challenge the notion that citizens are entitled to cheap energy. All six monarchies (Saudi Arabia, the United Arab Emirates, Kuwait, Oman, Qatar, and Bahrain) have raised prices on transportation fuel (see Table 1). Three have increased prices on electricity and water in citizens’ homes. Meanwhile, electricity and water subsidies for businesses have been reduced in five of the six monarchies. Across the Gulf, Iran has taken similar steps.

Policymakers hope higher energy prices can produce a number of helpful effects:
• Relieve pressure on government budgets at a time when oil and gas revenues are low
• Reduce domestic demand for oil and gas that can otherwise be exported
• Increase the relative attractions of noncarbon sources of energy
• Encourage conservation and efficiency, which helps reduce carbon emissions and the energy intensity of GDP while increasing overall productivity

Energy subsidy reforms also signal a change in state-society relations, at least in the way those relations are portrayed by political scientists. Since subsidies and other state benefits are deployed to build legitimacy for autocratic regimes, they are considered politically risky to retract. Increased energy prices have caused unrest in other oil-exporting countries.

However, the Gulf experience (at the time of writing) has gone smoothly. Most price increases have been modest and most energy products remain heavily subsidized and among the world’s cheapest. But political leaders have warned that further increases are likely. This brief presents a snapshot of the progress of subsidy reform in the Gulf, documenting policy changes in all six monarchies and briefly examining the role of energy and the state.