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Saudi Arabia Must Review Its Oil Subsidies, Former Adviser Says

Dec. 27 (Bloomberg) -- Saudi Arabia will need to reduce fuel subsidies that are becoming an ever-greater fiscal burden as its population grows, a former adviser to the country’s oil minister said.

The world’s biggest exporter of crude has a domestic fuel subsidy bill exceeding 162 billion riyals ($43 billion) a year, according to Mohammad Al-Sabban, an independent Saudi-based economist and energy consultant. Citigroup Inc. said in a report Sept. 4 that the kingdom may need to import oil by 2030 if its domestic crude use continues to outpace gains in production.

“Reviewing fuel prices in Saudi Arabia is inevitable if not a priority,” Al-Sabban said Dec. 20 by e-mail from the Red Sea coastal city of Jeddah. “Rapid growth in consumption is a real problem that can’t continue in any way. There is a general conviction on that on all levels in the kingdom.”

Three years after the Saudi government agreed with an initiative by the Group of 20 nations for inefficient fossil-fuel subsidies to be phased out, it has not yet announced plans to raise local fuel prices. Saudi Arabia is the world’s largest consumer of oil per capita with 4.7 metric tons, or 35 barrels, a year, according to the International Energy Agency.

The country, the de-facto leader of the Organization of Petroleum Exporting Countries, is losing potential export revenue by selling oil domestically at $5 to $15 a barrel when international buyers pay more than $100, said al-Sabban, who was a senior economic adviser at the ministry of petroleum and minerals before retiring this year.

Largest Subsidy

Saudi Arabia depends on oil for 86 percent of its annual revenue and is accelerating exploration for natural gas and planning to develop solar and nuclear power to preserve more of its valuable crude for export.

The International Energy Agency, in this year’s annual World Energy Outlook, said Saudi Arabia has the world’s largest fuel subsidy after Iran, at $61 billion a year.

Rapid population growth is adding to the gain in fuel consumption, which is increasing at an annual rate of 7 percent, said al-Sabban. The country’s population is rising at 3.2 percent a year, according to the central department of statistics and information.

Saudi Arabia is among the nations feeling the least pain at the pump, with a gallon of premium gasoline costing Saudis 1 percent of their daily income in October, 58th out of 60 countries, data compiled by Bloomberg show. It cost Americans 3 percent, Kuwaitis 0.7 percent and Venezuelans 0.3 percent.

The main problem with subsidies in Saudi Arabia is that they are becoming an economic burden on the government as they benefit all classes, including the rich and expats, and not only the low-income classes, al-Sabban said.

The IEA assumes in its New Policy Scenario that the Saudi government will reduce oil and gas subsidies “but cutting subsidies and raising prices is not an easy task,” it said in its annual World Energy Outlook published last month.

“Phasing out fuel subsidies is a very sensitive topic in the kingdom,” al-Sabban said. “It can’t be done at one step and it can’t be done suddenly.”

To contact the reporter on this story: Wael Mahdi in Manama at wmahdi@bloomberg.net

To contact the editor responsible for this story: Stephen Voss at sev@bloomberg.net

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