VZCZCXYZ0000
PP RUEHWEB

DE RUEHRH #0125/01 0271340
ZNY CCCCC ZZH
P 271340Z JAN 10
FM AMEMBASSY RIYADH
TO RUEHC/SECSTATE WASHDC PRIORITY 2393
RHEBAAA/DEPT OF ENERGY WASHINGTON DC
INFO RUEHHH/OPEC COLLECTIVE

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 
------- 
 
¶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 
------------------------------- 
 
¶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 
--------------------------------------------- -------- 
 
¶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 
--------------------------------------- 
 
¶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 
------- 
 
¶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