Reforms in energy prices, the first step on the road to a more effective system

One of the goals of the energy policy in Saudi Arabia is and still, to harness the natural resources owned by the Kingdom to meet the needs of the Saudi citizen. In order to achieve this goal, Saudi Arabia has had to maintain a balance between getting a good return from the oil, gas, and their products, and between ensuring the continuation of an affordable price of the energy to the consumer to be used at homes and commercial and industrial establishments. Because of the economic growth in the KSA in the last decades, domestic demand has increased on energy, in which facilities, houses and new factories need more electricity and water, which means increasing pressure on the ability to maintain the aforementioned balance. On another hand, some argue that the growing domestic demand for energy has reached to such an extent that it may exhaust all of the energy resources of Saudi Arabia in the coming twenty years, which may lead to Saudi inability to export altogether.
This analysis led some observers to call for raising the prices of some services such as fuel, electricity, and water, to reduce the pace of the increase in the domestic demand for energy. The proponents of this view is right about the importance of increasing of domestic demand for energy, and there is an actively work by the Kingdom to mitigate the effects of this increase in demand, by encouraging more effective solutions, such as the use of cars that consume less fuel, or through applying better methods of isolation at homes and buildings. But the growing of the energy demand in the consumer sector represents only half the truth, in the energy system, starting at oil production from underground wells through converting it to vital resources such as electricity, drinking water, and fuel, and ending with delivering it to homes and organizations, is a very complicated process in terms of the need of specific steps at each stage, and standing on accurate nuances of this system is indispensable in order to understand the challenges involved. One of the goals of King Abdullah Center of Petroleum Studies and Research is providing the policy-makers with these nuances and independent good opinion, which helps them to understand the system and its complexity. With regard to the energy policy in the kingdom, there is an important thing that has been overlooked by many people outside KSA, which is the vital role played by some institutions and companies that benefit from the energy in its initial form, whether it was fuel, oil or gas in the local market, as these institutions and companies in this sector convert this energy to useful products, such as electricity, water, basic petrochemical products or cement. This group of companies firms is called «industrial mediator sector »
The Centre’s team has programmed and worked on creating deep models for this important sector over the last two years. The results showed that there are additional clear potential to reduce the overall energy consumption in Saudi Arabia, without the need to prejudice the prices of the energy to the final consumers such as houses, businesses and others. As a first step, the procedures that will be provided by the Kingdom may open the door to more successful reforms in the energy sector as a whole. The current prices paid by the «industrial mediator sector» companies and other industrial companies in exchange for oil and gas, is less than what their counterparts in the global market pay. Furthermore, the low energy resources prices, which helps with the cash flow for those companies, leads to the logical outcome of which is that these companies do not have a motivation to use effective or more qualified techniques, as what they pay to buy fuel is less than what they will be charged to improve the efficiency. To give an example: the weakness of the material incentives of the companies that provide the consumer with its products, such as water companies, electricity, cement and others to buy more effective and more fuel-efficient equipment or generators, is weak in light of the current prices. Saudi Arabia put this in its consideration, and has already enact some regulations to encourage the optimum use of natural resources, leading to more effective and efficient energy through a combination of technological and technical standards, such as the Saudi energy effectiveness Center, as well as the King Abdul Aziz City for Science and Technology and the Saudi Commission of the standards, specifications and quality, and others. The studies and analyzes of King Abdullah Petroleum Studies and Research Center in the field of industrial mediator sector, showed that modifying the prices paid by these companies in exchange for fuel consumption, oil and gas is going in a direction similar to those of the international market, would encourage more investment in the effective technology and mechanisms fields, and will result in significant savings of the Kingdom’s resources in general. And this will save the overall energy consumption of oil and gas, up to one million barrels (MBOE) per day, with a doubling of what will be available in the future when compared to the continuity of using the current techniques, and this in turn will provide in future the possibility of selling millions of barrels of oil in the global market or keep it in the wells for future generations, which means a real economic benefit for the Kingdom. Moreover, we are going to say that a lot of what will be provided by the Kingdom can be achieved, for example: by changing the prices, the impact on the incomes of the industrial mediator sector companies will be reduced, if this amendment has coincided with the provision of credit facilities, to get invested in solar and nuclear energy technologies. This in turn will bring a lot of what we expect from energy savings. Moreover, what will result from reducing domestic consumption implies that Saudi Arabia plays its role in addressing the challenges of climate changes in the world. The kingdom is aware of this, and sought to invest in the field of nuclear and alternative energy, As previously noted that the kingdom supports the efforts of national sectors to increase the energy conservation and improve its efficiency. However, our findings mentioned that the efforts that will be provided by the Kingdom wouldn’t be necessarily by changing the prices of the energy consumed by homes and companies, therefore, the reforms in the energy prices could be the first step to a more efficient energy consumption system within the kingdom, where Our studies have shown that Saudi can maintain its position as the largest exporter of oil for decades to come through to taking some simple steps, contrary to what many of those who speak in the media.

Researcher King Abdullah Center for Petroleum Studies and Research


Axel Bayrou
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