Fuel subsidies take toll on GCC

A senior World Bank economist says promoting energy efficiency would drive economic development.

Ms. Shamshad Akhtar, World Bank regional VP for Middle East and North Africa, looks on as Dr. Alex Kremer speaks at the launch of his book  "How the Middle East and North Africa can rise above spatial disparities in Dubai, United Arab Emirates on Tuesday, June 15, 2010. Photo: Charles Crowell fir The National

The GCC is missing out on huge economic gains because of its dependence on fuel subsidies, says a senior economist at the World Bank. Lowering energy subsidies and introducing other policies to promote energy efficiency would help to drive economic development, said Alex Kremer, the senior sector economist for the Middle East and North America at the World Bank.

"In economic terms the payback of energy efficiency is incredible," Mr Kremer said in Dubai yesterday. "Where energy is artificially cheap, firms tend not to invest in energy efficiency measures." Economists have long urged governments across the region to remove price caps, saying low prices provide little incentive for consumers to limit fuel consumption. They argue government revenues would be boosted by pricing the cost of domestic fuel closer to international levels.

The GCC, along with the wider MENA region, is the only region globally where the amount of oil needed to generate one dollar of GDP is increasing, Mr Kremer said. Even the fast-emerging Asian economies of China and India are reducing the amount of energy they use per unit of GDP. "It's very hard to avoid the fact that this could be linked to the level of subsidies in this region [which] are high," he said.

Energy subsidies accounted for 7 per cent of GDP within the MENA region before the global financial crisis, according to estimates by the World Bank. "There may be strong political and social reasons for these subsidies but one has to think about how efficient this is in economic terms as it encourages very intensive forms of production and very energy intensive lifestyles," he said. Signs are emerging of a growing awareness among GCC economies about the need to take greater steps to conserve energy. In April, the UAE increased petrol prices by 11 per cent, making the cost of the fuel for consumers the highest in the Gulf. But even with the hike, prices at the pump are still 35 per cent below international rates.

Subsidies capping the cost of electricity in the GCC have also been blamed for contributing to increasing power consumption in the region and slow investment in expanding networks of power plants. Abu Dhabi is drawing up a policy to slow the emirate's considerable power use by putting an emphasis on managing energy consumption. Although the removal of energy subsidies is a question of political will to some extent, Mr Kremer said, there was also a lack of understanding of how much money could be saved through simple energy efficiency measures such as better building design or energy-saving light bulbs.

Governments need to improve the dissemination of information about better energy efficiency while introducing finance mechanisms to pay for the technology, he said. Another socio-economic drawback to energy subsidies was that they were regressive, benefiting the wealthy who consumed the most, Mr Kremer said. "There is a tendency for fuel subsidies to benefit the better-off in society more than those who have less money to spend on fuel."