Saudi Arabia has put a cap on rising gasoline prices in hope of stimulating domestic fuel demand and economic activity, amid fears of further crude oil price hikes.
The move goes rather against Saudi Arabia's efforts to eliminate its subsidies on the energy sector over the last five years. Riyadh has increased domestic refined products and electricity price twice since then – in 2016 and 2018. The government sought to raise the prices gradually, without putting a harsh burden on the economy, but the rising cost of living has left many Saudis complaining about the reform nevertheless.
Gasoline prices, which jumped to SR2.28/l for 91R and SR2.44/l for 95R for July, amplified concerns about struggling domestic demand, despite still being significantly lower than international gasoline prices.
Prices increased after oil prices rose to a multi-year high last week, prompted by Opec+ inability to reach an agreement about supply quotas. The lack of consensus spurred concerns about a further oil price rise going forward, which would kick gasoline prices even higher up.
In an attempt to stave off the impact on lower income Saudis, domestic prices will now be fixed at the June 2021 level of SR2.18/l ($0.58/l) for 91R and SR2.33/l ($0.62/l) for 95R gasoline, starting from 10 July. The prices will continue to be reviewed and adjusted monthly in accordance with global prices, but the government will bear the costs of any rise above the new ceiling, according to a statement carried by state-run Saudi Press Agency.
"One way to read the [fuel price] cap, is that the government expects oil prices to rise further. The Citizens Account hasn't been adjusted [to account for higher oil prices]," a Riyadh-based economist said.
The Citizens Account was established in late-2017, as a means-test monthly cash transfer program to protect vulnerable Saudi families from the financial impact of the government's economic reforms, including raising fuel prices, rather than using subsidies. It has paid out more than Riyals 94bn ($25bn) since its launch, but the roll-out has been slow and four years on the program is still not fully in place.
Meanwhile, Saudi gasoline demand has struggled to recover after it has been hit by Covid-19 pandemic. Gasoline demand stood at 468,000 b/d in January-April this year, according to the latest data from the Joint Organisations Data Initiative (Jodi). This is just slightly up from 455,000 b/d in 2020 and still sharply down from 550,000 b/d in 2019, before the pandemic hit.
Average driving activity across Saudi Arabia stood just 3pc above a 13 January 2020 baseline in June, and on par in May, according to mobility data from US technology firm Apple. A cap on gasoline prices may encourage higher driving activity.
Struggling domestic demand prompted Saudi Arabia to export more gasoline. In the first six months of this year the kingdom exported on average 184,000 b/d of gasoline, up from 132,000 b/d in the same period last year, according to Vortexa. This is even higher than pre-Covid levels of 173,000 b/d in 2019.
