In order for Saudi Arabia to effectively address some of its most pressing challenges it will need to make some hard, unpopular and, quite likely, disruptive choices. The current uproar over the expulsion of illegal foreign workers, for example, doesn’t change the fact that it is a necessary step in re-ordering the incentives of private-sector employment in the Kingdom. Nobody is happy about it and perhaps there are better ways to accomplish this goal; nonetheless the goal needs to be accomplished in order to address the more pressing priority of finding employment for Saudi nationals.
In the not too distant future, Saudi Arabia will need to address an even harder issue: domestic energy pricing. As with its labor market, domestic energy pricing needs to be rationalized to align incentives to achieve better results in terms of allocation, distribution and conservation of energy resources.
Justin Dargin, Energy and Middle East Scholar at the University of Oxford, has some suggestions.
“In order for MENA countries to stabilize their competitive advantage, they must gradually increase gas prices to a sustainable level, bringing prices at least to the cost of production from unconventional natural gas fields. Undoubtedly, instituting energy price reform in the industrial sector would increase production costs. But, if it is instituted in a phased process, combined with governmental assistance to mitigate structural adjustment, deleterious structural adjustment may be alleviated and mitigate an overall decline in competitiveness.
To accomplish such a task, MENA governments should implement dual-track pricing reforms that aspire to gradual liberalization In enacting sustainable dual-track reforms, prices for the most economically productive sectors, such as industry, should be structured to at least meet the cost of production for the unconventional gas reserves of that particular country. A second track, for residential consumption, should be priced at cost-plus to provide a predetermined margin above the basic cost of production to guarantee a reasonable return on investment. Such a dual-track system would encourage international oil companies to invest their capital, time, expertise and technology in the production of natural gas in the MENA region. Liberalizing prices will have the effect of dampening demand and energy consumption while permitting prices to increase to sustainable levels and encouraging investment in unconventional natural gas production.
Moreover, MENA governments would benefit from implementing minimum energy performance standards (MEPS) to encourage energy efficiency. MEPS are sets of procedures and regulations that legally mandate a minimum energy performance of manufactured products. Through the adoption of MEPS, governments set certain energy efficiency thresholds for products such as home appliances, construction frameworks and industrial equipment to reduce overall energy consumption.
As a corollary, MENA governments should create a regulatory structure to enforce energy efficiency standards in the construction and renovation of buildings, enforce MEPS to reduce life-cycle costs, and promote net-zero site energy use. Net-zero energy use requires that a significant amount of the energy consumed on site is offset by renewable energy onsite, such as through the use of solar panels. The amount of solar energy that falls on the region uniquely situates MENA countries to take advantage of net-zero construction, which can be reinforced by an overall reduction in consumption through MEPS and lighting technologies such as LED lights.”
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