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Efficient Industrial Energy Use: The First Step in Transitioning Saudi Arabia’s Energy Mix

Executive Summary:

External observers worry about whether Saudi domestic consumption of oil will crowd out exports. This is based on simple extrapolations which suggest that in a little more than 20 years Saudi Arabia may become a net importer of hydrocarbon fuels.
However, our research does not support this. Based on the “baseline scenario” macroeconomic assumptions in Oxford Economics’ global economic and industry models, we project Saudi Arabia’s energy balances until 2032 using the KAPSARC
Energy Model (KEM). We analyze several cases:

  • continuation of current pricing policies;
  • immediate deregulation of fuel prices;
  • phased deregulation of fuel prices; and
  • a combination of incentives and small price increases that capture many of the benefits of deregulation.
Our projections suggest that implementing these
alternative fuel-pricing and technology investment

policies would likely encourage the adoption of more efficient power generation and water desalination technologies. The alternative policies alter the transfer prices of fuels between sectors, but maintain the prices at which energy is sold to households. Future analyses will examine the next logical step of adjusting household energy prices in transitioning Saudi Arabia’s energy economy to match the efficiency of developed nations.

For the Saudi energy economy, we find these alternative policies achieve a total economic gain that ranges between $430 billion and $505 billion (in real USD 2014), compared with continuing the current policies. Policies that manage transition can therefore be implemented without materially reducing the economic benefits.

Our results could be used as a benchmark for an efficient energy transition in the Kingdom. They apply whether decisions to invest in new capacity follow a reform of transfer prices of fuels, or simply result from collective stakeholders’ decisions

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