By Rob L. Wagner
12 February 2016
Jeddah – Irfan Mohammed stared at the pump at a petrol station as the cost to fill the tank of his 2001 Toyota Camry rose steadily to about $8.70.
“I guess that’s one less sandwich for lunch today,” said Mohammed, a mid-level manager for a food vendor as he sat in his car on the Mecca-Jeddah Highway about 20km south of Jeddah. Mohammed, who drives all day, six days a week for his job, was joking. Still, he admitted to some anxiety that the cost of driving his own car for his company comes out of his pocket.
Before the Saudi government raised petrol prices by as much as 100% in December, Mohammed rarely paid more than $5 to top off the fuel tank of his car. He calculated that an additional $75-$85 would come out of his pocket each month. “It adds up,” he said.
Petrol prices rose to 20 US cents from 12 cents per litre for regular grade fuel and 24 cents from 12 cents for premium grade. Water and electricity price rises became effective on January 11th. The price increases were the first wave of economic reforms the Saudi government is scheduling to boost revenues to try to close a $98 billion budget deficit.
A steep decline in revenue as crude oil prices fell as low as $31 per barrel prompted the Saudi government to implement austere economic measures to generate revenue and educate citizens that government spending must be curbed.
The increases at the pump were met with mixed reactions from the public, ranging from outrage to resignation as the government signals that the era of subsidies and entitlements is ending.
Economists caution that the effect of the fuel price hikes will not be apparent until late summer. The poor and small and medium-sized businesses will likely be affected the most.
Muhammad Naqvi, a driver for a women’s college with a long list of private female clients, said he drives 16 hours a day, often seven days a week. Unlike most drivers who own their vehicles — often economical Toyota Camrys — Naqvi drives a Toyota Fortuner SUV, with relatively poor fuel consumption. Often making multiple trips a day to Jeddah’s far-flung international airport terminal, it is not usual for Naqvi to fill his tank daily.
“I’m in real financial trouble,” he said. “I haven’t raised my rates for my private clients yet because they complain but eventually I will have no choice.”
Bill Farren-Price, chief executive officer of Petroleum Policy Intelligence, a London-based global energy research company that focuses on the Middle East, said Saudi Arabia’s poor will be hit the hardest.
“There will be an impact on the poorer elements of society,” Farren-Price said. “There is not an alternative to move around and not a great deal of public transport. They have no choice but to drive.”
Farren-Price said that perhaps of equal concern is the effect on Saudi Arabia’s inflation rate.
“The other issue will be raising some inflationary impact and it will be interesting to see how the Saudi economy will handle it,” he said.
Saudi Arabia averaged about a 2.76% inflation rate from 2000 to December 2015, with a drop in December to 2.3%. Food prices averaged about a 1.4% increase year-on-year, and transportation inflation rates rose an average of 1.3%, according to Trading Economics, which provides economic data for 196 countries.
Saudi Arabia can expect to see overall inflation rise to at least 2.8% in 2016 and up to 3.5% in 2017, according to the UN Consumer Price Inflation Forecast.
The International Monetary Fund forecast is a little more optimistic, pegging the kingdom’s 2016 inflation rate at 2.33%, rising to 2.85% in 2017 and 2.89% in 2018. However, the projections were made before the fuel price increase announcement.
Turki H. Fadaak, research and advisory manager for Al-Bilad Investment Company, noted the effects of higher fuel prices spurring inflation may not be as great as some consumers anticipate and current predictions may remain unchanged.
“The increase in fuel rates will not show any impact soon but we can expect sometime in the future that it might affect prices of goods and services,” Fadaak said. “However, the decrease in the prices of (imported) international goods due to the (US) Federal Reserve raising the interest rates will make up for any negative effect.”
Saudis are taking the slow approach to dealing with the budget shortfall and looking for long-term solutions. Limiting oil production may not be a practical option for Saudi Arabia as a means to boost oil prices to increase revenue.
“If Saudi Arabia and [the Organisation of the Petroleum Exporting Countries] limit oil production we will see sustained higher oil prices but a long-term decline in the market share,” Farren-Price said.