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