SAUDI OFFICIALS ON ENERGY SUBSIDIES

C O N F I D E N T I A L RIYADH 000125



SIPDIS



DEPT FOR NEA/ARP, EEB/ESC/IEC(HAMMANG),S/CIEA(SULLIVAN)



E.O. 12958: DECL: 01/26/2020

TAGS:ENRG, EPET, PGOV, SA

SUBJ: SAUDI OFFICIALS ON ENERGY SUBSIDIES



REF: RIYADH 108



Classified by Ambassador James B. Smith for reasons 1.4 (b) and (d)



Summary

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1. (C) Saudi government leaders up to the ministerial level say

privately they would love to lower the Kingdom's deep discounting of

domestic energy prices, especially of natural gas and transportation

fuels. They recognize the need to lower skyrocketing energy demand,

in part to reduce the need to build more costly energy generation and

transmission infrastructure. However, they judge the political

risks of a popular backlash as undercutting the benefits of reforming

energy market regulation, resource allocation, and price setting

mechanisms. They have been studying previous cases of energy market

liberalization in other countries to generate ideas, and some see the

G20 (e.g., the Pittsburgh Summit leaders' statement) as offering

support for liberalizing energy prices in Saudi Arabia. End summary.





Speedbumps to Subsidy Reduction

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2. (C) DeQty Finance Minister for Economic Affairs Sulaiman Al-Turki

discussed Saudi energy subsidy policies in passing during a January

25 meeting with Econcouns (other topics septel). Asked about Saudi

Arabia's commitment to phasing out energy subsidies, a SAG goal often

cited by Saudi leaders both publicly and privately, Turki

acknowledged that this was a priority for his government but that he

believed fixing the Saudi natural gas market was a higher priority

and should be tackled first. He pointed out that he serves on the

Kingdom's gas allocation committee, and expressed frustration that

the government has been unable to agree to raise the price of natural

gas in years from the extremely low price of $.75 per million BTU.

He noted that political considerations were more important than

financial ones when it came to energy price hikes, and an unfortunate

result is that despite Saudi Arabia's massive gas reserves and

production, the country consumes all its natural gas production

domestically. He also noted that Saudi Arabia wants to develop

renewable energy sources, especially solar, which are likely to

require subsidies to compete, at least initially.





Balancing Political Harmony with Economic Savings

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3. (C) This tracks with what Assistant Minister of Petroleum and

Mineral Resources (MinPet) Prince Abdulaziz bin Salman has told us in

recent meetings. He describes the issue of natural gas pricing as "a

big deal" for his ministry and government. He said MinPet has been

trying to push gas pricing reform for the last 20 years. However, he

and others were cautious to avoid allowing reform efforts to have

unintended perverse consequences. For example, in the 1990s the

natural gas board had advised then-King Fahd to allow it to set a

higher price. Instead, the King'sQesponse was a decision to lower

gas prices.



4. (C) Prince Abdulaziz asserted that the SAG would like to reform

the Kingdom's energy pricing mechanisms, but they represent a

sensitive social issue for the Saudi people. Conveying the view of

both the Saudi government and the royal family, the Prince said,

"We're mindful to avoid a backlash" and most concerned about the

societal (vice political or economic) impact of reform efforts

attempted without careful planning to minimize the impact on the

Saudi people. He emphasized, "Change must be sustainable. [Raising

prices] takes money from the pockets of our populace." He said Saudi

Arabia is looking for examples of previous reform efforts, such as

U.S. energy sector reforms in the 1970s, as well as the California

energy blackouts in 2000 - 2001.



5. (C) Responding to our request for information about Saudi Arabia's

plan to implement the G20 Pittsburgh Summit agreement "to phase out

and rationalize over the medium term inefficient fossil fuel

subsidies," the Prince noted that Saudi Arabia had been represented

by Finance Minister Assaf at the summit, and "our ears perked up when

we first heard about this" from media reports. He said MinPet had

asked the Finance Ministry for details about the "scope" of this

commitment and was in the process of studying it. Suleiman Al-Turki

on January 25 also indicated that the SAG still had a lot of work to

do before it could propose a plan to reduce subsidies.





Low Gasoline Prices Encourage Smuggling

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6. (C) Saudi leaders have similar concerns about the Kingdom's

artificially low gasoline prices (roughly $.45/gallon for 91 octane,

and $.60/gallon for 95 octane). Senior advisor to Minister Naimi,

Ibrahim Al Muhanna, told us that GCC member energy ministers are



concerned about regional gasoline and diesel smuggling, especially to

the UAE and Kuwait from Saudi Arabia, since prices here are so much

lower than across its borders (e.g., he said the Kingdom's gasoline

is 1/3rd of UAE prices). He said GCC members were considering how to

eliminate price disparities between their countries to reduce

smuggling and encourage trade, but there was no consensus on what the

price should be. Countries with comparatively low prices like Saudi

Arabia are concerned about the implications of raising fuel prices,

while other GCC members viewed the possibility of lowering prices as

a move further away from a free market price.



7. (C) Asked why the Saudi price for gasoline needed to be so much

lower than the UAE, Al-Muhanna asserted that the reason is the

starkly different percentages of expatriates in each country. With

lower numbers of expats in Saudi Arabia, the Kingdom prefers to use

consumer commodity discounts and subsidies to support Saudi citizens.

In contrast, since the Emirates is "90% expats," the UAEG is forced

to "just give its citizens cash." (Note: The Saudi government

prefers subsidies and welfare programs over cash payouts because it

considers the latter as harder to limit cost increases and minimize

embezzling. It also facilitates greater government oversight of how

welfare funds are spent. End note.)



8. (C) Regarding smuggling, Al-Muhanna asserted that the worst

smuggling is to the UAE and Kuwait but smuggling to India, Jordan,

Oman, Somalia, Sudan, and Yemen also is a major problem. Asked for

specifics, Al-Muhanna explained that many smugglers buy sludge for

export, into which Saudi rules allow them to inject up to 7% diesel.

Instead, he said, smugglers inject 50% diesel, truck the mixture to

the UAE, and ship it out from Jebel Ali for export. The excess

diesel is removed along the way. Qatar had been subject to similar

scams and as a result had changed its regulatory system to eliminate

this practice. He said he was astounded by the creativity of

smugglers who shipped gasoline abroad in many types of containers.

The Saudi government recognizes that low prices encourage smuggling,

he concluded, but politically there was not much they could do about

it.





Comment

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9. (C) Most of the SAG's technocratic elite would love to reduce and

eventually eliminate the "discounts" that are equivalent to deeply

subsidized commodity prices. In their view, this would help

accelerate the country's economic reform program, encourage

efficiency, reduce waste, and in the case of energy, increase export

earnings by freeing up fuel and gas that is wasted because of its

artificially low price. Minister Naimi told DOE DepSec Poneman that

the extremely low price of energy in Saudi Arabia makes it harder for

the country to justify adopting alternative energy sources like solar

energy. SAG officials are also painfully aware that they need to

reduce the pace of skyrocketing domestic energy demand to lower the

cost of the new facilities necessary to meet this demand, such as

electricity generation plants. Nevertheless, the Saudi people have

come to view cheap energy as their birthright, posing a significant

impediment to raising energy prices, especially when many pro-reform

Saudi leaders are also pursuing social changes (e.g., improving

education) they hope will unlock a broader range of much-needed

reforms down the road. While we believe that the SAG will steadily

work at finding ways to reduce energy subsidies, it is likely to

continue to pay a high cost for social harmony while it works to wean

its citizens off the habit of excessively cheap energy. End comment.



Smith