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Gasoline Demand, Pricing Policy and Social Welfare in Saudi Arabia

Key Points:

In the face of low international oil prices, countries in the Gulf Cooperation Council recently implemented fuel price reform across a number of sectors. Saudi Arabia, for example, announced in December 2015 an increase in the gasoline price. We undertook a welfare analysis in this paper to estimate the net gain in social welfare that resulted from this price increase. Our results show that: 

Gasoline demand is generally price inelastic in Saudi Arabia, the current lack of alternative transport modes, particularly within cities, being one possible reason. Our preferred econometric estimates suggest that the price elasticity is between -0.09 and -0.15. Therefore, the gasoline price increase is unlikely to dampen domestic demand significantly. 

The gasoline price increase could potentially result in a net gain in social welfare of as much as SAR 2 billion annually at 2010 prices, which is equivalent to 0.1 percent of the Kingdom’s gross domestic product (GDP) in 2015. 

These welfare gains do not take into account the external costs of gasoline demand and driving. The gasoline price increase would also offer additional welfare benefits to consumers through reduced greenhouse gas emissions, air pollution, congestion and accidents. 

The structure of the Saudi labor market and government spending on public employee salaries suggests that the direct loss for consumers due to the price increase would probably be offset by gains for producers (mainly Saudi Aramco) and the government.

About the Project:

KAPSARC’s projects on energy demand model how factors such as income, prices and energy efficiency influence energy demand in different countries, with a strong focus on Saudi Arabia and the Gulf Cooperation Council. The project’s objective is to quantify the influence of each of these factors and estimate the relative levels of energy efficiency across different sectors of the economy. Our energy demand research also looks at the welfare implications of policies that influence energy demand.

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