Impact of Domestic Fuel Price Reforms on the Use of Public Transport in Saudi Arabia

About the Project

We developed the KAPSARC Energy Model for Saudi Arabia (KEM-SA) to understand the dynamics of the country’s energy system. It is a partial equilibrium model formulated as a mixed complementarity problem to capture the administered prices that permeate the local economy. KEM-SA has been previously used to study the impacts of various industrial fuel pricing policies and improved residential efficiency on the energy economy. The passenger transportation model presented in this paper helps understand more of the end-use energy demand.

Key Points

In 2016, policymakers in Saudi Arabia increased domestic transportation fuel prices, which are expected to approach market levels in the near future. Current low crude oil prices offer an excellent opportunity for policymakers to deregulate the passenger transportation sector without a significant change in local fuel prices. We developed a bottom-up transportation sub-model and integrated it with the KAPSARC Energy Model (KEM) to assess whether consumers could afford such reforms; and the resulting travel mode choices, energy consumption levels and revenue. We do not consider price-induced efficiency improvements; hence, the results would represent an upper bound for the shift to public modes.

Despite a deregulation of the passenger transportation sector, Saudi households would continue to allocate one of the lowest transport budgets (as a percentage of income) in Gulf Cooperation Council (GCC) countries and also stay within Saudi Arabian historical boundaries.

Deregulating fuel prices would encourage consumers to travel by more efficient public transport modes, as they become available in the near future, leading to significant energy savings and CO2 emissions reductions of between 4 million to 26 million metric tons (mt) per year.

The Kingdom would receive an annual average $8.2 billion as additional revenue from domestic sales and exports in the varying crude price scenario and $5 billion in the fixed $60/bbl scenario.

Despite the increase in transport fuel price, the net gain for Saudi Arabia in the varying crude oil price scenario remains positive as a result of substantial increase in revenue and the introduction of more convenient public travel modes.

Our findings show that analyzing energy policies using empirical estimates are generally valid even for large variations in price; however, if new transport modes and technologies are introduced in Saudi Arabia, consumer response may be slightly greater than that of empirical estimate, which did not account for such new modes.