Higher Gas Prices, Long Lines: What Cheap Oil Means For Saudi Arabia | KUOW News and Information

Higher Gas Prices, Long Lines: What Cheap Oil Means For Saudi Arabia

Dec 31, 2015
Originally published on December 31, 2015 8:55 am

A new era in Saudi Arabia was demonstrated at gas stations across the country on Monday night: Long lines of cars stretched from the pumps as drivers filled up to beat price hikes announced by the government earlier in the day.

It was an unusual scene for the world's largest oil producer, but it underscored the economic impact of dramatically lower crude prices on a government budget that relies on it.

The swift deadline to chop government subsidies on gas, water and electricity surprised Saudis, and some stations ran out of gas and shut down in the storm of demand.

But economists were not surprised by the nation's historic deficit of more than $80 billion as oil prices collapsed this year, dropping to less than $40 per barrel from $100 just 18 months ago.

The cuts unveiled Monday by government ministers represented a fundamental change in the country's social compact, which has maintained Saudi royal family control for decades. No taxation and no representation has been the equation in a country with no income tax on individuals, free education and health care, and heavily subsidized utilities — but now part of the deal has been rolled back.

The gas lines and an immediate reaction on social media demonstrated the risks of economic reforms.

"The views run the gamut from totally angry to extremely defensive to celebratory," said one social media observer who followed the debate but didn't want his name published.

Social media hashtags on the budget trended on Twitter as Saudis digested and debated the new reality.

The fiscal 2016 budget announced in a high-profile media event in the capital gave an unusually detailed picture of the proposed reforms. The government intends to narrow the huge deficit through spending cuts, reforms to energy subsidies and a push to raise revenues from taxes and privatization. The changes signaled tougher times in the region.

"This is pretty new — let's say hardcore — for a state budget to include all these things," says John Sfakianakis, a Riyadh-based economist who is a former government adviser. "Over the next year or so, you will see the introduction of a sales tax — a VAT tax — eventually some form of income tax."

Even the price of tobacco and soft drinks could rise through new taxes.

"The era of plenty has come to an end. This is it. The party is over," he says about a government that did not adequately address the challenge to diversify an oil-based economy as long as prices were high. Now, the government is signaling that "oil will be in the $30-$40 range for some time."

This "end of an era" moment in Saudi Arabia points to a new social experiment across the Gulf, as oil-rich monarchies grapple with lower state revenues.

Belt-tightening across the oil-producing Gulf States already has begun, but Saudi Arabia, with the largest Arab economy, has gone further, with measures that directly affect domestic prices.

"I think the tension is that a lot of people feel that 'the state is spending a lot, but I still don't have a lot' — and it's not going to get easier, and people know that," says Karen E. Young, a senior resident scholar at the Arab Gulf States Institute in Washington.

The other Gulf monarchies will be watching Saudi citizens' reactions for tremors. Will they accept a reduction in the generous welfare system that has been the bargain for social peace?

In early responses from social media, government supporters aggressively defended the new measures — and the more extreme supporters attributed complaints about the budget to those serving Iranian interests and "contributing to Safavid ambitions of hegemony," which equated grousing to support for rival Iran. Middle class Saudis raised more pointed questions about royal prerogatives.

"Seems like normal people are the ones who have to pay for Saudi wars and royal luxury," was one post on Facebook.

"In some ways, it's a blessing," says Khaled Almaeena, a veteran journalist and political analyst based in Jeddah. He watched the lines grow at the gas pumps and declared it "crazy" to wait in line for gasoline that may have increased in price by 50 percent but still costs less than a dollar a gallon. The new austerity plans "will take us to fiscal responsibility and teach us to be responsible," he says.

It may also lead Saudi citizens to demand a bigger say in governance.

"That's the very important and essential question," says economist John Sfakianakis — "whether the social contract will evolve and change when there is an income tax."

Copyright 2015 NPR. To see more, visit http://www.npr.org/.

Transcript

STEVE INSKEEP, HOST:

Now, whoever wins the presidency will be managing one of America's most vital friendships. It's the relationship with Saudi Arabia, whose rulers have been close to the United States for generations.

RENEE MONTAGNE, HOST:

And for all their wealth, the Saudis are facing a tough economic year - in fact, a nearly $100 billion deficit, prompting the government this week to announce big budget cuts and propose new taxes. Citizens of the kingdom are also facing sticker shock at the gas station. This gigantic oil producer is raising domestic fuel prices. NPR's Deborah Amos recently returned from Saudi Arabia. Good morning.

DEBORAH AMOS, BYLINE: Good morning.

MONTAGNE: And let me get this straight. There is something of a panic in Saudi Arabia about getting gas.

AMOS: Yeah, there were extraordinary scenes in Saudi on Monday - huge lines at the gas pumps to fill up before those gas prices went up. All of this came on the same day that the government announced its 2016 budget. A dramatic drop in oil prices blew a big hole in that budget, so there were immediate subsidy cuts for water, for electricity and gas. The gas is still ridiculously cheap. We're talking about a dollar a gallon. But this is just the beginning of a five-year reform plan. I talked to economist John Sfakianakis, and he says Saudi officials have to show they're adjusting to the new reality of the oil market.

JOHN SFAKIANAKIS: The era of plenty has come to an end. The party's over. And over the next year or so, you will see the introduction of a sales tax, a VAT tax, eventually some form of income tax.

AMOS: You know, this is all pretty revolutionary stuff for a country that's used to the welfare state that's paid for by oil revenues.

MONTAGNE: Well, Deborah, will that lead to a revolution? I mean, many people hate to pay taxes.

AMOS: Yeah. Well, look, reactions have been all over the place - angry, proud, jokes. The middle-class reaction is the most interesting. A young Saudi women wrote on Facebook - I go to university with a royal, a princess. She doesn't pay for utilities or gas, so why should I?

Saudis are asking will the royals pay their share? What do I get? Why don't I have a say in what's going on here? You know, Americans know this phrase, no taxation without representation. Saudis could be asking the same thing.

MONTAGNE: Well, this matters, of course, because Saudi Arabia is a major player in the region. It's a big U.S. ally. It's also a rival to Iran. And it's been involved in wars in Syria and Yemen. So will it stay active in 2016? I mean, is it going to spend the money?

AMOS: The budget numbers here are clear. The kingdom will continue to spend on arms, even more next year than this one.

MONTAGNE: How, then, do you see this all shake out over the next year?

AMOS: No one is willing to predict because this is a revolutionary change for Saudi Arabia. So expect a volatile year ahead in a country where stability really matters. But economists say oil prices are likely to remain low for some time. The energy markets have fundamentally changed. For the first time, with all this turmoil and all this uncertainty in the Middle East, the price of oil is going down and not up.

MONTAGNE: NPR's Deborah Amos is just back from Saudi Arabia. Thanks very much.

AMOS: Thank you. Transcript provided by NPR, Copyright NPR.