GCC energy reforms: more price hikes expected – report

Energy prices across the Gulf Cooperation Council countries will increase further in coming years as regional governments continue to implement additional reforms, a new report has stated.

Fiscal pressures due to the decline in oil revenues are forcing GCC governments to reduce spending and energy prices.

The United Arab Emirates announced that it would deregulate gasoline and diesel prices and introduce a new pricing policy linked to global levels in July last year. While Saudi Arabia revealed a five-year strategy in December that will hike natural gas, gasoline, diesel, electricity as well as water prices.

Since the Saudi announcement, other countries in the GCC such as Kuwait, Bahrain and Oman have followed suit, outlining plans to increase energy prices in the near future.

More price increases are very likely across the region in the coming years, the report by Arab Petroleum Investments Corporation stressed.

“While the GCC countries have taken a step in the right direction, the path for energy-pricing reform will be long and fraught with risks,” it said.

“The increase in energy prices will have direct and indirect effects on the welfare of households and the profitability and competitiveness of GCC industry,” it added.

A move to increase energy prices can induce negative shocks affecting households, industries and the wider economy.

Higher energy prices can spur inflation, especially if they result in a shift in expectations and wage-price spirals.

They also reduce the welfare of households both directly by raising the price of electricity, water and petroleum products, and indirectly by increasing the price of other goods and services that use energy as intermediate inputs.

Meanwhile higher energy prices also increase input costs for industries, reducing profits. This is especially true for energy-intensive industries that are not able to pass on the cost increase to end-buyers, the report stated.

APICORP suggested that governments should design schemes to compensate low-income households and also establish specialised funds to provide technical assistance and soft loans to help industries that are most affected.

Also, designing an effective communication strategy that transmits information in a timely and transparent manner and reaches all segments of society impacted by the price increases is key.

“It is the ability of the GCC governments to put in place such schemes and communicate their policies effectively and transparently that will determine the success of their energy-pricing reform programmes in the longer term,” the report added.