DOHA, Qatar: Few current political leaders would view Iran as a country to emulate.
On the Arab side of the Persian Gulf, Iran is seen as the local hegemon, a country with an abrasive relationship with the world that stands as an example of how not to conduct the affairs of state.
But the International Monetary Fund might argue otherwise. It believes Iran’s sweeping reform of energy consumption subsidies offer a model for other governments grappling with unwieldy subsidy burdens. Policymakers across the Gulf, where rising domestic energy consumption is threatening exports, would be wise to take note.
Iran’s success with subsidies has been overshadowed by its political confrontation with the West and is not well known. But last December the Islamic republic became the first major oil exporter to replace subsidies with direct payments to families, sweeping away some $60 billion in fossil fuel giveaways that, for years, had undermined the economy and the environment.
Iran’s many years of selling gasoline at 6 British pence per liter (5% of UK prices, or about 10 U.S. cents) and electricity at 1p per kilowatt hour (8% of UK prices, or about 1.6 cents) had pushed energy consumption to unsustainable heights, ravaging state coffers, and ultimately triggering a tipping point.
With global wholesale gasoline prices near $2 per liter, fuel smuggling was rampant. At home, negligible prices spurred waste and pollution through spurious driving, or by exaggerated use of air-conditioning and heating. The subsidies, at more than 20% of GDP, provided Iranians with a small benefit, but at enormous cost.
On the Arab side of the Persian Gulf — in Saudi Arabia, Kuwait, Oman, Bahrain, Qatar and the United Arab Emirates — energy subsidies are taking national treasuries for a similar ride.
The UAE, for example, is subsidizing consumption of natural gas, electricity and oil products to the tune of $2,500 per resident, per year, according to recent numbers from the International Energy Agency. In 2010, the UAE’s energy subsidy reached $18 billion, equal to 6% of GDP, a larger overall burden than in far more populous oil producing countries like Indonesia and Mexico.
Likewise, Kuwait’s electricity and fuel subsidies reached $2,800 per capita. And in Saudi Arabia, the government fritters away the equivalent of 10% of GDP – $44 billion – to provide residents with some of the world’s lowest gasoline and electricity prices.
Cheap energy is a chief cause of the wasteful consumption that has branded UAE residents with the ignominious distinction of holding the largest ecological footprint on earth. Kuwaitis are not far behind, nor are Qataris, with the world’s biggest per capita carbon emissions.
Of course, Iran’s reforms were probably also triggered by the deepening political and economic pressure from international trade sanctions linked to its nuclear program. The Gulf Arab countries are under no outside pressure to take action. In fact, until now, Gulf Arab policymakers fretting over their mushrooming subsidy tab could take comfort in knowing that their neighbor, Iran, was even more profligate. No more.
This year, when the IEA re-tallies global energy subsidies, Saudi Arabia will likely lead the ranks as the world’s No. 1.
What’s to be done? One hopes Gulf Arab policymakers are learning from Iran’s experience.
There are certainly parallels. Before President Mahmoud Ahmadinejad jacked prices up, a kilowatt-hour of electricity cost roughly the same in Iran as Saudi Arabia, Kuwait and in parts of the UAE. Now Iranians pay according to a rising slab tariff that starts at 2.7 U.S. cents for small amounts of power, and rises to European levels — 19 cents — for large amounts.
Gasoline prices leaped from 10 U.S. cents per liter to 40 cents for rationed fuel, and from 40 cents to 70 cents for additional gasoline purchases outside the quota.
Ahmadinejad’s government, which has been so clumsy elsewhere, is described by the IMF as handling the reforms with dexterity, preparing the ground with acute attention to detail. While embarking on a media campaign focusing on the waste, the government opened bank accounts for each Iranian family, and began depositing regular $40 dividends in each.
The cash handouts were roughly calculated to offset the new prices. Iranians were told they could only access the accounts after prices were raised. This created popular support. And, as initial reports have shown, Iranians have been pocketing some of the dividend by adopting less wasteful habits.
Could the Arab countries across the Gulf try something similar? Maybe. A recent YouGov poll of Gulf citizens found that most believe that cheap energy is “theirs” by right of birth, or that the government has a responsibility to provide subsidized power.
However, most citizens also said they would not oppose government raising electricity tariffs in the name of conservation, if it helped the country maintain exports. Done with care, reforms could work.
Early results in Iran show that subsidy reduction has been effective. Oil and gas consumption has dropped, and the country has been able to increase exports of oil, refined products and petrochemicals, at least until a recent tightening of the embargo.
Until now, energy policy in the Gulf has been one sided, focused on increasing supply. That policy is starting to look unsustainable. Demand management and energy conservation will become a necessity if these countries are going to maintain their status as the world’s chief hydrocarbon exporters in the medium and longer term.
One way of keeping the exports flowing, counterintuitive as it may sound, is by emulating Iran.
