Energy Policy 148 (2021) 111941

Contents lists available at ScienceDirect

Energy Policy
journal homepage: http://www.elsevier.com/locate/enpol

Energy price reform in Saudi Arabia: Modeling the economic and

environmental impacts and understanding the demand response
Mohammad Aldubyan , Anwar Gasim *
King Abdullah Petroleum Studies and Research Center (KAPSARC), Riyadh, Saudi Arabia

A R T I C L E I N F O A B S T R A C T

Keywords: Saudi Arabia has regulated domestic energy prices for decades, setting them below international market levels.
Energy subsidies Energy subsidies in Saudi Arabia are generally implicit because they lead to foregone revenues for the govern­
Energy price reform ment. Low energy prices also encourage rapid energy demand growth and wasteful consumption, while limiting
Gasoline
incentives to invest in energy efficiency. Saudi Arabia recently started to reform energy prices, leading to large
Residential electricity
Saudi Arabia
increases in gasoline and residential electricity prices in 2018. To measure the economic and environmental
impacts of energy price reform, we econometrically model gasoline and residential electricity demand using
Harvey’s (1990) Structural Time Series Model. Our estimated equations reveal that gasoline demand and resi­
dential electricity demand in Saudi Arabia are strongly price and income inelastic, despite the major reforms that
were recently implemented. Our welfare analysis also shows that the energy price reforms in 2018 in gasoline
and residential electricity respectively delivered welfare gains of 8.8 and 3.8 billion SAR annually (2.3 and 1.0
billion US$). Additionally, our decomposition analysis reveals that these energy price reforms were the largest
contributors to the observed decreases in gasoline and residential electricity consumption in 2018.

1. Introduction subsidy (IEA, 2020).

Energy demand in Saudi Arabia has surged in recent decades. From
1983 to 2018, annual gasoline consumption quadrupled from 8 billion
to 32 billion liters (MEIM, 2019; JodiOil, 2019), while residential
electricity use jumped from 15 to 130 TW-hours (TWh) (MEIM, 2019;
SAMA, 2019). In per capita terms, gasoline consumption increased from
around 670 to 1000 L while residential electricity consumption
increased from 1.3 to 4.0 MWh during the same period (MEIM, 2019;
SAMA, 2019; JodiOil, 2019). Along with steady economic and popula­
tion growth, subsidized energy likely played an important role in these
increases.
The government of Saudi Arabia, like many around the world, has
long set domestic energy prices below international market levels.
Subsidized energy helps keep prices stable and energy affordable,
providing essential support to lower-income households. However,
subsidized energy can encourage high demand growth and wasteful
consumption while limiting incentives to invest in energy efficiency.
Although energy is often sold at or above production costs in the
Kingdom, the gap between domestic and international prices represents
foregone revenue on crude oil and other fuels not exported—an implicit
Lahn and Stevens (2011) looked at Saudi Arabia’s rapid growth in
domestic energy consumption. They ran simulations that showed that,
in a business-as-usual scenario, Saudi Arabia could “become a net
importer of oil by 2038” (page 2). Such rapid growth in domestic energy
consumption not only carries implications for global oil markets but also
for global emissions, given that Saudi Arabia is already one of the largest
emitters in the Middle East. According to BP (2019), Saudi Arabia
emitted 571 million tonnes of carbon dioxide (CO2) emissions in 2018,
or around 18 tonnes per person—one of the highest levels globally.
Continued rapid growth in domestic energy consumption and CO2
emissions can both strain Saudi Arabia’s fiscal budget and limit its
climate change mitigation efforts.
However, Saudi Arabia has recently started to implement major
economic and social changes following the announcement of Saudi
Vision (2030) (SV 2030, 2016). SV2030 encompasses several key pro­
grams, such as the Fiscal Balance Program, which aims to balance the
government budget by 2023 by expanding oil and non-oil revenues and
improving spending efficiency (Fiscal Balance Program, 2017–2019).
The Fiscal Balance Program includes a value-added tax, levies on ex­
patriates, and energy price reform. Energy price reform is one of the

* Corresponding author.,
E-mail addresses: anwar.gasim@kapsarc.org, gasim.anwar@gmail.com (A. Gasim).

https://doi.org/10.1016/j.enpol.2020.111941
Received 4 March 2020; Received in revised form 2 September 2020; Accepted 1 October 2020
Available online 23 November 2020
0301-4215/© 2020 The Authors. Published by Elsevier Ltd. This is an open access article under the CC BY license (http://creativecommons.org/licenses/by/4.0/).
M. Aldubyan and A. Gasim Energy Policy 148 (2021) 111941

most critical and visible initiatives, and it involves both increasing en­
ergy prices and linking them with the international market. It was stated
in SV 2030 (2016) that “providing subsidies with no clear eligibility
criteria is a substantial obstacle to the energy sector’s competitiveness”
(page 51).
The government launched what is commonly referred to as the ‘first
wave’ of energy price reform in the days between December 30, 2015
and January 1, 2016, with increases to fuel, electricity, and water prices.
It implemented the ‘second wave’ at the start of 2018, focusing on
gasoline and residential electricity, the two major sources of energy
consumed by households. Table 1 shows the result of both waves of
energy price reform.
Raising energy prices is arguably one of the most cost-effective and
efficient policy instruments for managing domestic energy consumption,
encouraging greater investment in energy efficiency, influencing con­
sumer behavior, and reducing negative externalities related to fossil
fuels (Parry et al., 2014). But policymakers often look for alternatives
because higher energy prices impose a heavy burden on lower-income
households. The relatively regressive effects are a barrier to higher en­
ergy prices, both in developing countries, where eliminating subsidies is
often the focus, and in developed countries, where a carbon tax may be
the goal.
To minimize the negative impact of increased energy costs on lower-
and middle-income households, the government launched the Citizens’
Account in tandem with the second wave of energy price reform. The
scheme, which provides eligible families with monthly cash transfers, is
funded using revenue generated from the higher energy prices (Fiscal
Balance Program, 2017). Thus combined, energy price reform and the
Citizens’ Account lift government revenue while providing targeted
support to the most affected households. This combination is in line with
the goals of SV 2030 (2016): “Subsidies for fuel, food, water and elec­
tricity will be better utilized by redirecting them towards those in need”
(page 29).
To help inform policymakers, we model the impact of the 2018 en­
ergy price reforms on energy demand, consumers, producers, the gov­
ernment, the environment, and social welfare in Saudi Arabia. We
estimate econometric equations for gasoline and residential electricity
and use them to conduct a welfare analysis, something very few past
studies have done. Atalla et al. (2018) formulated a gasoline demand
equation and employed it to perform a welfare analysis of the Kingdom’s
2016 gasoline price increase. Blazquez et al. (2017) utilized a dynamic
stochastic general equilibrium model to test hypothetical scenarios in
which the country’s domestic oil price was gradually increased. To the
best of our knowledge, no prior study of this kind has evaluated the
impact of 2018’s extensive reforms to gasoline and residential electricity
prices, a gap we aim to fill.
2. Literature Review
2.1. Review of gasoline demand studies for Saudi Arabia
A considerable number of studies have been conducted on Saudi
gasoline demand. The studies generally revealed that gasoline demand
in Saudi Arabia was price and income inelastic in the short and long run
(see Table 2 for a summary). The only exception among the published
studies in Table 2 was Al-Sahlawi (1997), who estimated a long-run
income elasticity of 1.50. However, the study was a relatively older
study with an estimation period of 1971–1995.
More recent econometric studies such as Atalla et al. (2018) and
Mikayilov et al. (2019) revealed a short-run price elasticity between
− 0.10 and − 0.12 and a long-run price elasticity between − 0.09 and
− 0.21. This range of values suggests that gasoline demand in Saudi
Arabia is strongly price inelastic. Both studies also found that the
short-run income elasticity was insignificant. This result is not surprising
given that real gross domestic product (GDP) and real non-oil GDP are
often used to measure household income in Saudi Arabia in the absence
of a disposable income indicator. Both real GDP and non-oil GDP may
fluctuate in the short run due to changes in oil prices that have minimal
impact on real household income. In the long run, however, sustained
periods of high or low oil prices lead to changes in household incomes.
Mikayilov et al. (2019) used a time-varying coefficient cointegration
approach and estimated a long-run income elasticity that varied over
time but was less than 0.15 throughout their study period. The income
variable they used was real non-oil GDP per capita.
Furthermore, there have been attempts to model how Saudi house­
holds respond to gasoline price changes using approaches not based on
statistics or econometrics. Algunaibet and Matar (2018) developed a
transport model that yielded techno-economic estimates of the gasoline
price elasticity in Saudi Arabia. Their estimates ranged from − 0.08 to
− 0.13, providing further evidence on the inelasticity of gasoline demand
with respect to its price.
2.2. Review of residential electricity demand studies for Saudi Arabia
There are fewer published studies that attempted to model residen­
tial electricity demand in Saudi Arabia. In fact, among the seven studies
that we found (see Table 3), three focused on modeling total electricity
demand instead of residential. The estimated elasticities obtained from
such studies may not necessarily reflect how the residential sector would
respond to changes in prices and income.
Among the remaining studies that modeled residential electricity
demand, Eltony and Mohammad (1993) is an older one with an esti­
mation period of 1975–1989. More recently, Atalla and Hunt (2016)
found that residential electricity demand is price and income inelastic,
with estimated long-run elasticities of − 0.16 and 0.48, respectively.

Table 1
Energy prices (nominal) before and after two waves of energy price reform.
Energy type Prices before first wave of Prices after first wave of reform Percentage change Prices after second wave of reform Percentage change
reform (January 1, 2016) (January 1, 2018)

Gasoline SAR/liter US$/liter SAR/liter US$/liter SAR/liter US$/liter

91 RONa 0.45 0.12 0.75 0.20 67% 1.37 0.37 +83%

95 RONa 0.60 0.16 0.90 0.24 50% 2.04 0.54 +127%

Electricity (residential)b SAR/kWh US$/kWh SAR/kWh US$/kWh SAR/kWh US$/kWh

0-2000 kWh 0.05 0.01 0.05 0.01 0% 0.18 0.05 +260%

2001-4000 kWh 0.10 0.03 0.10 0.03 0% 0.18 0.05 +80%
4001-6000 kWh 0.12 0.03 0.20 0.05 67% 0.18 0.05 − 10%
6001+ kWh 0.15 to 0.26 0.04 to 0.07 0.30 0.08 N/A 0.30 0.08 0%

Notes.
a
RON = Research octane number.
b
Electricity prices in Saudi Arabia vary with the level of consumption in each month.SAR = Saudi Arabian Riyals; US$ = United States Dollar; kWh = kilowatt-hour.
Sources: Alriyadh (2015), Akhbaar24 (2015), ECRA (2013b), ECRA (2019), Saudi Aramco (ND), and SEC (2020).

2
 Table 2
Previous studies of gasoline demand in Saudi Arabia (or a group of countries that includes Saudi Arabia) that generated price and/or income elasticities. Note: KSA = Kingdom of Saudi Arabia.
Gasoline Studies Country or Region of Estimation Price Income Notes

M. Aldubyan and A. Gasim

Study Period Elasticities Elasticities

SR LR SR LR

Al-Sahlawi (1988) KSA 1970–1985 − 0.08 − 0.67 0.11 0.92 Per capita model that included the real price of automobiles.
Al-Faris (1992) KSA 1970–1990 − 0.08 − 0.30 0.02 0.07 Model included a stock of cars variable.
Eltony (1994) GCC 1975–1989 − 0.09 to − 0.11 to 0.21 to 0.23 to 0.48 Per capita models that included a stock of cars variable in addition to the driving age population. The
− 0.11 − 0.13 0.41 GCC sub-group includes KSA.
GCC 1975–1989 − 0.04 − 0.05 0.28 0.33
Sub-group
Eltony (1996) GCC 1975–1993 − 0.11 − 0.17 0.31 0.48 Per capita models. Same GCC and GCC sub-group definitions as Eltony (1994).
GCC 1975–1993 − 0.04 − 0.05 0.38 0.43
Sub-group
Al-Faris (1997) KSA 1970–1991 − 0.09 − 0.32 0.03 0.11 Monetary variables expressed in nominal rather than real terms.
Al-Sahlawi (1997) KSA 1971–1995 − 0.16 − 0.80 − 0.30 1.50 Per capita model.
Chakravorty et al. KSA 1972–1992 − 0.08 − 0.52 0.10 0.66 Per capita model.
(2002)
Al Yousef (2013) KSA 1980–2010 − 0.28 to 0.55 to 0.56 Per capita model.
− 0.36
Arzaghi and Squalli 32 fuel-subsidizing 1998–2010 − 0.05 − 0.25 0.16 0.81 Per capita model that included urbanization and temperature-related variables. The list of 32 countries
(2015) countries includes KSA.
Atalla et al. (2018) KSA 1981–2015 − 0.10 − 0.15 0.15 Per capital models. The above uses real GDP per capita as a measure of income, while the below uses
KSA 1981–2015 − 0.09 − 0.09 0.61 real non-oil GDP per capita instead.
Algunaibet and Matar KSA N/A − 0.084 to N/A N/A N/A Techno-economic estimates of the gasoline price elasticity that are not based on econometrics.
(2018) − 0.129
Mikayilov et al. (2019) KSA 1980–2017 − 0.13 − 0.05 to smaller than Per capita model with time-varying coefficients. Elasticities grew larger towards the end of the period,
− 0.31 0.15 during which price reforms were implemented.
Hasanov et al. (2019) KSA 1980–2017 − 0.09 − 0.14 0.39 Gasoline demand equation estimated as part of KGEMM, a macro-econometric model of the Saudi
energy economy. Non-oil GDP used as a measure of income.
3

Table 3
Previous studies of residential electricity demand (or total electricity demand) in Saudi Arabia (or a group of countries that includes Saudi Arabia) that generated price and/or income elasticities. Note: KSA = Kingdom of
Saudi Arabia.
Country or Estimation Sector Price Income Notes
Residential Region of Period Elasticities Elasticities
Electricity Studies Study

SR LR SR LR

Eltony and GCC 1975–1989 Electricity demand modeled for − 0.138 − 0.142 0.196 0.201 Per capita model that included income and price. Elasticities shown for the residential
Mohammad three sectors: residential, electricity demand model.
(1993) commercial, and industrial
Diabi (1998) KSA regions 1980–1992 Total electricity demand − 0.117 − 0.139 0.171 0.203 Panel fixed effects model with five KSA regions: central, western, eastern, southern, and
northern. Model included price and income and the following additional variables:
urbanization, temperature differences, and the real price of appliances.
Al-Faris (2002) GCC 1970–1997 Total electricity demand − 0.04 − 1.24 0.05 1.65 Error correction model that included income, own price, and the price of an alternative
fuel (LPG).
Atalla and Hunt KSA 1985–2012 Residential electricity demand − 0.16 − 0.16 0.48 Structural Time Series Model that included price, income, and weather variables.
(2016)

Energy Policy 148 (2021) 111941

Matar (2018) KSA N/A Residential electricity demand at − 0.05 to N/A N/A N/A Bottom-up physical model of a typical household that also included economic variables.
household level − 0.54
Hasanov et al. KSA 1985–2017 Residential electricity demand − 0.13 − 0.35 1.01 Per capita residential electricity demand single equation estimated then incorporated
(2019) into KGEMM, a macro-econometric model of the Saudi energy economy.
Mikayilov et al. KSA regions 1990–2016 Total regional electricity demand − 0.01 to − 0.06 to 0.05 to 0.10 to Error correction model within a cointegration framework for each region.
(2020) − 0.27 − 0.61 0.47 0.93
M. Aldubyan and A. Gasim
Matar (2018) is a bottom-up techno-economic estimate of the price
elasticity only, which he found to vary between − 0.05 and − 0.54.
Hasanov et al. (2019) estimated electricity demand equations as part of
a macro-econometric model, finding long-run price and income elas­
ticities of − 0.35 and 1.01, respectively.
Table 3 shows that residential and total electricity demand are price
and income inelastic in the short and long run, as was the case for
gasoline. The only exception was Al Faris (2002), who found that total
electricity demand in Saudi Arabia was price and income elastic in the
long run.
2.3. Review of econometric methods and the structural time series model
Many econometric approaches have been used to model energy de­
mand in Saudi Arabia. For example, Al-Sahlawi (1997) used a partial
adjustment model and ordinary least squares to estimate gasoline de­
mand elasticities. Al Yousef (2013) used a cointegration framework with
dynamic ordinary least squares, while Atalla et al. (2018) employed the
Structural Time Series Model (STSM).
Some econometric studies used linear time trends to capture exog­
enous factors such as technical progress. The problem with linear time
trends, as noted by Hunt et al. (2003a; 2003b), is that the underlying
trends in energy demand may be non-linear. This issue can be resolved
by using the STSM of Harvey (1990), also known as the unobserved
components model. The STSM allows users to model exogenous factors
such as technical progress using a stochastic non-linear time trend,
commonly referred to as the underlying energy demand trend (UEDT).
This approach arguably results in more realistic models of energy de­
mand (Hunt et al., 2003a; 2003b). The UEDT is a trend with a stochastic
level and slope. The linear deterministic trend is thus a special case of
the UEDT, which is obtained if the random disturbance terms for the
level and slope of the UEDT are found to be zero (Harvey, 1993).
The stationarity of time series does not play a fundamental role in
STSMs. As noted by Harvey (1997): “Traditional time series analysis
stresses the role of differencing in constructing models for
non-stationary time series. Although structural time series models can
be represented in differences, and hence specified from an analysis of a
suitably differenced series, it is not usually necessary to difference in
order to specify a suitable model. Working in levels makes interpretation
much easier” (Page 193).
While Atalla et al. (2018) used a STSM to estimate a gasoline demand
equation for Saudi Arabia, their estimation period ended before the
implementation of any of the reforms. Similarly, Atalla and Hunt (2016)
used a STSM to estimate a residential electricity demand equation. Still,
their estimation period ended before the reforms, and their model for
Saudi Arabia (among six countries modeled) did not pass 100% of the
diagnostic tests.
Given that the STSM provides a more flexible approach to modeling
exogenous factors such as technical progress, we employ the STSM in
this paper to estimate gasoline and residential electricity demand
equations for Saudi Arabia.
2.4. Review of previous welfare analyses and methods
Several studies have looked at the welfare effects of reforming energy
prices. As noted by Ellis (2010), most attempts have either relied on
partial equilibrium or general equilibrium approaches. General equilib­
rium approaches capture a wider range of effects but are data-intensive
and sensitive to the accuracy of the data and assumptions (Ellis, 2010).
Ellis (2010) summarized six studies, all of which found positive welfare
gt = α1 G gt− 1 + α2 G gt− 2 + β0 G pgt + β1 G pgt− 1 + β2 G pgt− 2 + γ 0 G yt + γ1 G yt− 1 + γ 2 G yt− 2 + UEDTt G + εt G
4
Energy Policy 148 (2021) 111941
effects from energy subsidy removal using different approaches.
Balke et al. (2015) and Aune et al. (2017) used general equilibrium
models to study the welfare implications of energy subsidy reform in
oil-exporting blocs that included Saudi Arabia. Both studies found that
energy price reform would be welfare enhancing in these blocs.
Furthermore, several studies have estimated the welfare effects of
energy price reform using a partial equilibrium approach. Ahmadian
et al. (2007) used their estimated gasoline demand equation to measure
the change in welfare due to energy price reform in Iran. Coady et al.
(2015) used central values of elasticity estimates from the literature to
conduct their welfare analyses, showing that energy subsidy removal was
welfare enhancing. In a more recent analysis, Coady et al. (2018) showed
using a partial equilibrium analysis that the global welfare gains from
energy price reform would be more than 1.4 trillion US$ in 2015. Davis
(2017) examined global gasoline and diesel subsidies and found that their
removal would increase welfare by 70 billion US$. Atalla et al. (2018)
used their estimated gasoline demand equation in a partial equilibrium
analysis to show that the gasoline price reform of late 2015 in Saudi
Arabia could result in a welfare gain of up to 1.66 billion 2010 US$.
Building on the work of Atalla et al. (2018), this study is, to the best of our
knowledge, the first to apply a partial equilibrium analysis to measure the
welfare effects of the 2018 energy price reforms that were implemented in
Saudi Arabia, which targeted gasoline and residential electricity.
Within microeconomic theory, five indicators are commonly used to
measure the welfare effects of a price change (Araar and Verme, 2019):
consumer surplus (CS), compensating variation, equivalent variation, Las­
peyres Variation, and Paasche Variation. Depending on which measure is
used, energy price reform could have different welfare effects. However,
Araar and Verme (2019) demonstrated that when the share of a good is a
small proportion of income, the various measures deliver similar welfare
changes for price increases of up to 50%. In the case of Saudi Arabia, gasoline
and electricity consumption together account for roughly 5% of a typical
household’s consumption, a small share (GASTAT, 2019). However, we do
examine the welfare effects of large energy price increases (>100%).
Nevertheless, Araar and Verme (2019) concluded that “in the absence of any
normative augment in favor of one particular measure, the sensible choice is
CS for the simple reason that this measure is always the median measure”
(page 23). In this study, we use CS to measure the welfare effects of energy
price reform in Saudi Arabia in a partial equilibrium analysis.
3. Methodology
3.1. Econometric methods
3.1.1. Modeling gasoline demand
Aggregate gasoline demand per capita is modeled as a function of the
real average gasoline price, real income per capita, and the UEDT.
( )
Gt = f PGt , Yt , UEDTt G (1)
where:
Gt = Total gasoline consumption per capita;
PGt = Real weighted average gasoline price;
Yt = Real GDP per capita;
UEDTt G = Underlying energy demand trend for gasoline consump­
tion.
The subscript t denotes the year. The superscript G denotes gasoline,
such that UEDTt G denotes the UEDT for gasoline consumption.
Equation (1) is estimated using the following dynamic autoregressive
distributed lag (ADL) specification:
(2)
M. Aldubyan and A. Gasim
UEDTt = ​ μt + ​ irregular ​ interventions ​ + ​ level ​ interventions ​ + ​ slope ​ interventions
The variables gt , pgt , and yt are the natural logarithms of Gt , PGt , and
Yt in year t, respectively, and εt is the random error term.
The ADL specification is more general when compared to the partial
adjustment model or the simple error correction model, which are spe­
cial cases of the general ADL specification (Cuddington and Dagher,
2015). When using an ADL specification, Cuddington and Dagher (2015)
recommended that each determinant of energy demand, such as price
and income, enter the equation “with at least two time subscripts” (page
191). Otherwise, starting with only one price term and one income term
in the equation is equivalent to imposing implausible restrictions a
priori. Following Atalla and Hunt (2016) and Atalla et al. (2018), we
include two lags given the roughly 30-year time horizon, which appears
to be a common ‘rule of thumb’ when working with STSMs and ADL
specifications. Thus, we start with an ADL specification with two lags as
the general unrestricted model/equation and then use the
general-to-specific approach to find a preferred equation.
The coefficients β0 and γ0 represent the short-run (impact) elastici­
ties for price and income, respectively. The corresponding long-run price
and income elasticities are given by В = β1−o +β
α1 − α2 and Γ =
1 +β2
1− α1 − α2 ,
γo +γ1 +γ2
respectively.
et = α1 E et− 1 + α2 E et− 2 + β0 E pet + β1 E pet− 1 + β2 E pet− 2 + γ0 E yt + γ 1 E yt− 1 + γ 2 E yt− 2 + δ0 E cddt + δ1 E cddt− 1 + δ2 E cddt− 2 + UEDTt E + εt E
The UEDT is a stochastic trend estimated through the STSM as fol­
lows.
( )
μt = μt− 1 + ρt− 1 + ηt ; ηt ∼ NID 0, σ2η (3)
( )
ρt = ρt− 1 + ξt ; ξt ∼ NID 0, σ2ξ
The level of the UEDT is denoted by μt , while ρt denotes the slope of
the UEDT. The two parameters together determine the UEDT’s shape
(Harvey and Shephard, 1993). The hyper-parameters ηt and ξt are white
noise error terms that are mutually uncorrelated and have means equal
to zero. Their respective variances are σ2η and σ 2ξ .
Equations (2)–(4) are estimated simultaneously in STAMP 8.3 using
the Kalman filter and maximum likelihood. If needed, we add irregular
interventions (Irr), level interventions (Lvl), and/or slope interventions
(Slp) to the model to ensure that it passes all diagnostic tests. These
interventions (or dummy variables) reflect the effect of major events or
structural changes that occurred during the model’s time horizon
(Harvey and Koopman, 1992). We follow the general-to-specific
approach by first estimating the general model given by Equations
(2)–(4). We then drop insignificant variables and add interventions
while checking an array of diagnostic tests1 until we obtain the preferred
parsimonious model. The interventions that are added change the shape
of the UEDT. When interventions are included, Dilaver and Hunt (2011)
1
We choose 10% as the maximum level for rejecting the null hypothesis for
estimated coefficients, added interventions to the model, and diagnostic tests.
Energy Policy 148 (2021) 111941
showed that the UEDT could be expressed as follows:
(5)
3.1.2. Modeling electricity demand
Aggregate residential electricity demand per capita is modeled as a
function of the real average electricity price, real income per capita,
cooling degree days (CDD), and a UEDT.
( )
Et = f PEt , Yt , CDDt , UEDTt R (6)
where:
Et = Total residential electricity consumption per capita;
PEt = Real weighted average residential electricity price;
Yt = Real GDP per capita;
CDDt = Annual cooling degree days (base temperature = 18 ◦ C).
UEDTt E = Underlying energy demand trend for residential electricity
consumption.
The subscript t denotes the year. The superscript E denotes the res­
idential electricity sector, such that UEDTt E denotes the UEDT for resi­
dential electricity consumption.
Equation (6) is estimated using the following ADL specification:
(7)
The variables et , pet , yt , and cddt are the natural logarithms of Et , PEt ,
Yt , and CDDt in year t, respectively, and εt is a random white noise error
term. As noted previously, we use a two-year lag given the time horizon
of this study. As was the case with the gasoline demand model, the co­
(4) efficients β0 and γ 0 represent the short-run (impact) elasticities for price
and income, respectively. The coefficient δ0 represents the short-run
(impact) elasticity for CDDs. The corresponding long-run price, in­
come, and weather elasticities are given by В = 1− α1 − α2 ,
βo +β1 +β2
Γ = 1− α1 − α2 ,
γo +γ1 +γ2
and Δ = 1− α1 − α2 ,
δo +δ1 +δ2
respectively.
The UEDT is a stochastic trend estimated within the STSM as pre­
viously shown.
3.2. Decomposition methods
Decomposition analysis is used to quantify the contributions of fac­
tors to a change in a variable or indicator (Ang and Zhang, 2000). Since
Ang et al. (1998) introduced the Logarithmic Mean Divisa Index (LMDI)
method, it has become the preferred method for decomposition analysis
because it is relatively easy to implement and does not leave behind a
decomposition residual, as noted by Ang (2005) and Ang (2015).
We use additive LMDI to decompose the change in gasoline/elec­
tricity consumption between two years (a start year and an end year)
into additive components that can be referred to as contributors,
contributing effects, determinants, or drivers. The sum of these additive
components is equal to the total change in gasoline/electricity con­
sumption. We follow the approach used by Alarenan et al. (2020) by
5
M. Aldubyan and A. Gasim
Fig. 1. Energy consumption in Saudi Arabia. Sources: Jodi Oil (2019), MEIM
(2019), and SAMA (2019).
applying LMDI to the estimated econometric equations.
3.3. Welfare analysis methods
Setting domestic prices below costs leads to deadweight loss (Coady
et al., 2015; Davis, 2017). We use the estimated Marshallian demand
equations to calculate the change in CS and thereby the deadweight loss
eliminated by energy price reform. We follow the same approach used
by Coady et al. (2015) and Davis (2017). Furthermore, we break down
the change in deadweight loss into changes in CS, producer surplus (PS),
and government revenues, following the approach used by Atalla et al.
(2018), who measured the welfare changes that resulted from Saudi
Arabia’s first wave of gasoline price reform in late 2015.
3.4. Data
The energy demand equations are estimated with annual time-series
data. Both models use identical GDP, population, and consumer price
index (CPI) data. The gasoline model includes gasoline consumption and
the real weighted average gasoline price, while the residential electricity
model includes residential electricity consumption, the real weighted
average residential electricity price, and CDD.
Residential electricity consumption was obtained from MEIM (2019)
and SAMA (2019). Gasoline consumption was obtained from MEIM
(2019) and JODI Oil (2019). Fig. 1 shows how residential electricity and
gasoline consumption evolved over the past several decades, high­
lighting the rapid growth in energy consumption.
Energy prices in Saudi Arabia are administered by the government
and only change following a government decree. Changes in energy
prices thus only occurred sporadically throughout the study period.
Residential electricity price data were obtained from ECRA (2013b),
Fig. 2. Weighted average energy prices (nominal) in Saudi Arabia. Sources:
ECRA (2013b), ECRA (2019), ECRA, 2016, Saudi Aramco.,(ND), SEC (2020),
and KAPSARC analysis.
6
Energy Policy 148 (2021) 111941
Fig. 3. Real GDP and population in Saudi Arabia. Sources: GASTAT (2019),
World Bank (2019), and KAPSARC analysis.
ECRA (2019), Saudi Aramco.,(ND), and SEC (2020). It is important to
highlight that electricity in Saudi Arabia is sold at different prices ac­
cording to the segment of consumption, and households are billed every
month. To obtain a weighted average electricity price, the price at each
consumption segment was weighted according to the number of invoices
issued in each segment in each year, and an average was subsequently
taken. The number of invoices at each segment was obtained from
ECRA, 2020a, 2020b, 2020c, 2020d, 2020e, 2020f, 2020g, 2020h,
2020i, 2020j. Data for missing years were linearly extrapolated from
available values. In the case of gasoline, price data were obtained from
Saudi Aramco (ND). Gasoline is sold in Saudi Arabia at two different
grades: 95 and 91 octane. In the decades before 2007, only 95 octane
gasoline was available in Saudi Arabia, as the cheaper grade was only
introduced into the market at the start of 2007. To obtain a weighted
average gasoline price, the price at each octane grade was weighted
according to its consumption using data from Saudi Aramco.,(ND). Fig. 2
shows the weighted average prices (in nominal terms) for gasoline and
residential electricity, highlighting the extent of the reforms in 2018.
Other domestic energy prices in Saudi Arabia for fuels such as crude oil
were obtained from Saudi Aramco.,(ND). Prices were deflated using the
CPI, obtained from GASTAT (2019).
Real GDP was obtained from GASTAT (2019), while population data
were obtained from the World Bank (2019) and GASTAT (2019), with a
slight adjustment to the 2018 population estimates. Fig. 3 illustrates
both variables evolving over the study period.
There was an issue related to the population data for the year 2018.
According to numerous news reports (such as Argaam, 2019), the
expatriate levies that were imposed as part of the Fiscal Balance Program
caused a large number of expatriate workers to leave Saudi Arabia, with
some estimates suggesting that up to 1.6 million exited the country
between 2017 and 2018. However, this trend was not reflected in the
2018 population figures obtained from either the World Bank (2019) or
GASTAT (2019). We therefore adjusted the population estimates for
Fig. 4. Annual cooling degree days in Saudi Arabia. Sources: GASTAT (2019),
World Bank (2019), and KAPSARC analysis.
M. Aldubyan and A. Gasim Energy Policy 148 (2021) 111941

2018 using data from GASTAT’s (2019) Labor Force Survey. Appendix A saved. These data were combined to estimate the deadweight loss
provides more details on how this adjustment was made. eliminated by energy price reform.
The hot climate in Saudi Arabia has a considerable impact on elec­ The external costs associated with each unit of electricity and gaso­
tricity demand because of the need for space cooling. CDD is often used line consumption in Saudi Arabia were needed to complete the welfare
to measure the requirements for cooling. CDD measures how many de­ analysis. These were obtained from Parry et al. (2014), which are the
grees the average ambient temperature is above 18 ◦ C. The higher the same estimates used by Coady et al. (2015), Davis (2017), and Atalla
ambient temperature, the higher the CDD, and hence the demand for et al. (2018), and were used in this study to calculate the total external
cooling. This variable was constructed using temperature data from the costs avoided annually by energy price reform. The total welfare effect is
Climate Change Knowledge Portal (2018) and is shown in Fig. 4. the sum of deadweight loss eliminated and total external costs avoided.
The welfare analysis rests on supply costs for gasoline and residential
electricity, which enable the calculation of subsidies and the deadweight 4. Results and discussion
loss eliminated by energy subsidy reform. Given that gasoline is inter­
nationally traded, the international market price can be used for the 4.1. Preferred econometric models
supply cost, as noted by Davis (2017). We used the free on board (FOB)
spot price for regular gasoline at Rotterdam port, which was around 1.9 Using Harvey’s (1990) STSM, we follow the general-to-specific
SAR per liter, obtained from Bloomberg (2019). For residential elec­ approach to obtain a preferred equation for each of the two sectors:
tricity, we used as the supply cost an estimate for the marginal cost of gasoline and residential electricity. The goodness-of-fit measures that
electricity generation in Saudi Arabia if fuels were purchased at inter­ were used to compare models include the Akaike information criterion
national market prices. This estimate was obtained from the KAPSARC (AIC), the R squared (R2 ), and the prediction error variance (PEV).
Energy Model (Matar et al., 2017). In the case of residential electricity, Both preferred models passed the full array of diagnostic tests. This
any reduction in domestic electricity consumption would save crude oil, includes multiple normality tests that are based on the Bowman-Shenton
which is used in power generation. We set the average Brent price in test, which is distributed as χ 22 . It also includes the heteroscedasticity
2018 obtained from Bloomberg (2019) as the value for each barrel of oil (H(h)) test, distributed as F(h,h). Other critical diagnostic tests include the
residual autocorrelation coefficients at the first three lags, r(1) at lag 1,
Table 4 r(2) at lag 2, and r(3) at lag 3, along with the Durbin-Watson statistic
The general and preferred gasoline demand models: estimated elasticities, (DW), which is relevant when there are no lagged dependent variables,
goodness-of-fit measures, and diagnostic test results. The *, **, and *** denote and the Box-Ljung statistic (Q(p,d)), which is based on the autocorrela­
statistical significance at the 10%, 5%, and 1% levels, respectively. The esti­
tions in the first p residuals, and is distributed as χ 2d . There is also a
mation period was 1981–2018.
predictive failure test χ 2f that examines how well the model predicts the
Estimated Coefficients General Unrestricted Model Preferred Model
final eight years of the estimation period, distributed as χ 28 . Unit root
G 0.38971*** 0.29672***
α1 tests are available in Appendix B.
α2 G 0.00602
β0 G − 0.10053*** − 0.09137*** 4.1.1. The gasoline demand model
β1 G 0.03090 The preferred gasoline model, which passed all diagnostic tests,
β2 G − 0.01029 revealed that gasoline demand is both income and price inelastic (see
γ0 G 0.07514 Table 4). An income elasticity of 0.15 is obtained for the long run, while
γ1 G 0.13306** 0.10409*** the short-run income elasticity is found to be statistically insignificant.
γ2 G − 0.03782 On the other hand, the price elasticity is found to be − 0.09 and − 0.13 in
Long-Run Elasticity Estimates the short and long run, respectively.
Income 0.28 0.15 Despite the energy price reforms that started in late 2015, gasoline
Price − 0.13 − 0.13 demand is found to be price and income inelastic. Studies such as
Hyper-parameters Algunaibet and Matar (2018) have suggested that as gasoline prices
Level 3.60924e-005 0.000000
undergo huge increases, consumers become more price responsive. We
Slope 0.000000 1.18163e-006
Irregular 7.51655e-005 9.20342e-005 use both rolling regressions and a time-varying coefficient approach
Interventions LVL 1983*** LVL 1983*** within the STSM to test for time variation in the price elasticity (see
LVL 1987*** LVL 1987*** Appendix C). The results confirm that gasoline demand continues to be
IRR 1989*** IRR 1989***
price inelastic, despite the reforms. The consistent price inelasticity of
IRR 1990*** IRR 1990***
IRR 1992*** IRR 1992**
gasoline demand is likely due to the absence of alternative transport
Goodness of fit options in major cities in Saudi Arabia.
PEV 8.822e-005 0.0001094 The estimated econometric model also provides an estimated UEDT.
AIC − 8.4708 − 8.5415
R2 0.99865 0.99793
Residual Diagnostics
Std Error 0.0093925 0.010460
Normality 0.30787 1.8642
H(h) H(7) = 5.2503** H(9) = 1.5863
r(1) − 0.029643 − 0.062413
r(2) 0.037371 0.0040325
r(3) 0.022832 − 0.0085072
DW 2.0354 2.0790
Q(q, d) χ23 = 3.5664 χ24 = 3.0330
r(q) r(5) = 0.10164 r(6) = − 0.23287
Auxiliary residuals:
Normality – Irregular 0.14303 0.020708
Normality – Level 0.21625 0.10252
Normality – Slope 1.6786 2.8562
Prediction Failure χ28 = 9.7229 χ28 = 11.2975
Fig. 5. Estimated UEDT for gasoline consumption. Source: KAPSARC analysis.

7
M. Aldubyan and A. Gasim Energy Policy 148 (2021) 111941

Table 5 The UEDT thus captures the combined effect of these exogenous factors
The general and preferred electricity demand models: estimated elasticities, on gasoline consumption over time.
goodness-of-fit measures, and diagnostic test results. The *, **, and *** denote Fig. 5 reveals that the UEDT for gasoline consumption in Saudi
statistical significance at the 10%, 5%, and 1% levels, respectively. The esti­ Arabia was upward sloping from 1990 onwards. It is difficult to predict
mation period was 1985–2018. the exact cause of this upward trend, but several exogenous factors
Estimated Coefficients General Unrestricted Model Preferred Model appear to play a role. According to Sivak and Schoettle (2015), the
α1 E 0.20968 average fuel economy of cars in the USA improved drastically between
α2 E 0.19464 1973 and 1991, reaching 21.2 miles per gallon. However, it only grew
− 0.06648* − 0.08998***
by 2.7 miles per gallon between 1991 and 2015, which translates to a
β0 E
compound annual growth rate of only 0.5% for the fuel economy of cars
β1 E − 0.03970
in the USA over that period. It is likely that fuel economy improvements
β2 E 0.11221**
in Saudi Arabia, where fuel economy standards were only implemented
γ0 E − 0.01312
in the mid-2010s, were limited during the 1990s and 2000s. Further­
γ1 E 0.13550 0.22451***
more, during these decades, the road network in Saudi Arabia grew
γ2 E 0.08764 extensively, while urban sprawl in major cities likely caused people to
δ0 E 0.29289** 0.39279*** live farther away from their jobs and families, leading to increased de­
δ1 E − 0.27070* mand for driving and thus an upward sloping UEDT.
δ2 E − 0.10868
Long-Run Elasticity Estimates 4.1.2. The residential electricity demand model
Price 0.01 − 0.09 The preferred model, which passed all diagnostic tests, revealed that
Income 0.35 0.22
residential electricity demand is income, price, and CDD inelastic (see
CDD − 0.14 0.39
Hyper-parameters Table 5). The income elasticity is statistically insignificant in the short
Level 0.000000 0.000166137 run and 0.22 in the long run. The price elasticity is − 0.09 in both the
Slope 5.36105e-006 0.000000 short and long run. The CDD elasticity is 0.39 in both the short and long
Irregular 0.000237259 0.000150270 run.
Interventions LVL 1991 LVL 1991*
SLP 2003* SLP 2003***
As was the case with gasoline, we use both rolling regressions and a
SLP 2015* SLP 2015*** time-varying coefficient approach within the STSM to test for time
Goodness of fit variation in the price elasticity (see Appendix C). Both methods suggest
PEV 0.00021808 0.00031502 that residential electricity demand became slightly more price inelastic
AIC − 7.4307 − 7.5335
over time, although the time variation is minimal. Thus, the reforms do
R2 0.99906 0.99803
not appear to have significantly altered the responsiveness of consumers
Residual Diagnostics
Std Error 0.014767 0.017749
to changes in electricity prices. The consistent inelasticity of residential
Normality 0.32720 0.71673 electricity demand is likely due to the critical need for cooling in a
H(h) H(6) = 0.23275 H(8) = 0.45918 country with a very hot climate and the lack of available substitutes.
r(1) − 0.52053** − 0.17806 The estimated UEDT for residential electricity consumption in Saudi
r(2) 0.11089 0.033817
Arabia, which captures how exogenous factors such as energy efficiency
r(3) 0.045924 − 0.15732
DW 2.9063 2.2345 and appliance ownership influence demand, was upward sloping up to
Q(p, d) χ23 = 8.7031 χ24 = 3.3698 2014, likely due to higher appliance ownership rates (see Fig. 6). Saudi
r(q) r(5) = 0.17090 r(6) = 0.11023 households in 2014 had more lights, washing machines, electric dryers,
Auxiliary residuals: and air conditioners when compared to those in 1985. Furthermore,
Normality – Irregular 0.97665 1.0324 very few energy efficiency policies were implemented in the 1980s,
Normality – Level 0.88316 0.19367
1990s, and 2000s. However, the Saudi government showed greater in­
Normality – Slope 1.1542 1.6555
Prediction Failure χ27 = 2.8925 χ27 = 7.7749 terest in energy efficiency in the 2010s. Not surprisingly, from 2014
onwards, the UEDT is found to be downward sloping. This sudden
change points to improvements in energy efficiency. It is unlikely that a
An upward (downward) sloping UEDT would suggest that if income, factor such as appliance ownership fell drastically between 2014 and
population, and the gasoline price were held fixed between 1981 and 2018. Instead, energy efficiency likely improved due to the large number
2018, then gasoline consumption would increase (decrease) because of of programs launched by the Saudi Energy Efficiency Center in the
exogenous factors. The most critical exogenous factors that can influ­ 2010s. These programs include minimum energy efficiency standards
ence gasoline consumption but are not included in the model are fuel for air conditioners, mandatory thermal insulation for new buildings,
economy, urban sprawl, congestion, and the length of the road network. energy efficiency labeling for appliances, and energy awareness
campaigns.

4.2. The economic and environmental impacts of energy price reform

Fig. 6. Estimated UEDT for residential electricity consumption. Source: KAP­
SARC analysis.
Subsidies in Saudi Arabia are implicit. Crude oil and refined products
such as gasoline are sold domestically at prices that may be above do­
mestic production costs, but below international market prices. There­
fore, when producers sell energy domestically at lower prices, they forgo
higher revenues that could have been obtained if the energy were
exported at international market prices instead. Blazquez et al. (2019)
have argued that the value of a barrel of oil saved in Saudi Arabia is not
necessarily the international export price. They used a general equilib­
rium model to show that a barrel of oil saved in the Saudi economy leads
to a long-run increase in welfare between $6 and $56, assuming an in­
ternational oil price of $52.9. This analysis suggests that there is a wide

8
M. Aldubyan and A. Gasim Energy Policy 148 (2021) 111941

range of values that can be attributed to oil or fuel that is saved in Saudi billion liters (in the long run) compared to the no-reform scenario. Using
Arabia. Nevertheless, in this paper, we choose to use the international monetary estimates for per unit external costs (Parry et al., 2014), we
export price as the value of a barrel of oil saved given the absence of estimate the total gain from reduced external costs to be SAR 4.7 and
agreement on its exact value. The price gap between the international SAR 6.6 billion in the short and long run, respectively. Adding up the
export price and the domestic price gives the implicit subsidy, which is a long-run increase in total surplus (that is, deadweight loss eliminated)
critical input to the following welfare analyses. and the reduction in external costs yields a total annual welfare gain of
SAR 8.8 billion for the Saudi economy as a result of gasoline price reform
4.2.1. Gasoline price reform in 2018.
We use the preferred gasoline demand equation to generate a de­ In the context of global climate change mitigation, it is helpful to
mand curve for the year 2018 to measure the welfare gains from the highlight precisely how many tonnes of CO2 emissions were avoided
gasoline price increase. This analysis holds all other variables (income, because of gasoline price reform. Assuming that burning a liter of gas­
population, and UEDT) fixed at 2018 levels while decreasing the gaso­ oline generates around 2.3 kg of CO2 emissions, gasoline price reform
line price from 1.50 SAR per liter, the actual weighted average price in would have reduced the country’s CO2 emissions by 4.6 million tonnes
2018, to 0.79 SAR per liter, what it would have been at the start of the (in the short run) and 6.4 million tonnes (in the long run) annually.
year in the absence of reform. This allows us to estimate the welfare It is important to emphasize that all the estimates that are presented
gains generated by current prices versus a counterfactual scenario in are annual and would accumulate over the years when compared to a
which they continued at their 2016–2017 levels. We also use the long- no-reform scenario. However, the size of the yearly welfare gains will
run price elasticity to conduct the welfare analysis. vary over time with changes to consumption levels and international
The welfare analysis reveals that the increase in gasoline prices re­ market prices for fuels such as gasoline, in addition to other factors.
duces CS by SAR 24.2 billion while directly raising PS by SAR 21.9
billion (see Table 6). Lower domestic consumption also frees up gasoline 4.2.2. Electricity price reform
for export at international market prices, lifting producer revenues for Following the same approach, we use the preferred residential
the refining sector by an additional SAR 4.4 billion. Therefore, pro­ electricity demand equation to generate a demand curve for the year
ducers enjoy a total gain of SAR 26.3 billion, SAR 2.1 billion more than 2018 to measure the welfare gains from the residential electricity price
the loss suffered by consumers. This net increase in total surplus equals increase. Since the preferred equation is static, there is only a single
the SAR 2.1 billion deadweight loss eliminated due to the reduction in price response, which is defined to be the long-run response. Thus, we
the implicit gasoline subsidy, as shown by Atalla et al. (2018). hold all other variables (income, population, CDD, and the UEDT) fixed
Most of the increase in PS results in increased revenues for the at 2018 levels and allow the electricity price to decrease from 0.185 to
government. Saudi Aramco, the national oil company, either wholly or 0.086 SAR per kWh, reflecting the real weighted average electricity
partially owns all the refineries in Saudi Arabia, and oil revenues from price in 2018 and what it would have been at the start of that year in the
Saudi Aramco make up most of the government’s revenues. Saudi Ara­ absence of reforms, respectively. This allows us to estimate the welfare
gain from price reform versus a counterfactual no-reform scenario in
which electricity prices remained at their 2016–2017 levels.
Table 6 The welfare analysis finds that higher electricity prices reduce CS by
The changes for consumers, producers, the government, and social welfare SAR 13.3 billion but raise PS by SAR 12.1 billion (see Table 6). The latter
caused by the energy price reforms. The total welfare change is the sum of the represents increased revenues for the power sector. Residential elec­
increase in total market surplus and the decrease in total external costs. tricity consumption drops from 139 TWh under a no-reform scenario to
Changes in: Due to: the actual consumption of 130 TWh. This 9 TWh reduction in electricity
Gasoline price reform in Residential electricity price consumption can save around 15.5 million barrels of crude oil. Valuing
2018 reform in 2018 the saved crude oil at the average Brent price in 2018, this generates
Consumer surplus − 24.2 − 13.3 additional revenues of SAR 4.6 billion for the oil and gas sector. The total
Producer surplus 21.9 12.1 gain for producers is therefore SAR 16.7 billion. Summing the loss to
Export revenues 4.4 4.6 consumers and gain for producers yields a net increase in total surplus of
Government 18.4* 14.4** SAR 3.4 billion.
revenues
Total market 2.1 3.4
The SAR 4.6 billion increase in revenues for Saudi Aramco represents
surplus increased revenues for the government. Furthermore, the Saudi gov­
External costs − 6.6 − 0.4 ernment controls 81.2% of the Saudi Electric Company (SEC) through
Total welfare 8.8 3.8
change

Notes: *Estimated by assuming 70% government ownership of gasoline pro­

ducers. **Estimated using 81.2% direct and indirect government ownership of
electricity producers.

mco (2017) controlled around 70% of total gasoline production at do­

mestic refineries in 2017. Based on this figure, gasoline price reform
boosts government revenues by SAR 18.4 billion in 2018, 70% of the
total increase in PS. We note that this estimate may be low because, since
2017, Aramco has been actively increasing its market share. As an upper
limit, if the gains in PS were fully passed on to the state, government
revenues increase by the full SAR 26.3 billion.
In addition to the increase in total surplus, gasoline price reform
brings substantial benefits to Saudi Arabia’s economy by reducing
negative externalities. The four major external costs associated with
gasoline consumption are CO2 emissions, local air pollution, traffic
congestion, and road accidents. Our analysis shows that gasoline price Fig. 7. Change in gasoline consumption decomposed into six contributing
reform in 2018 saves between 2.0 billion liters (in the short run) and 2.8 factors called effects. Source: KAPSARC analysis.

9
M. Aldubyan and A. Gasim
74.3% direct ownership plus an additional 6.9% through shares held by
Saudi Aramco. Therefore, the increase in government revenues from the
power sector is SAR 9.8 billion. Overall, the total increase in government
revenues because of electricity price reform is SAR 14.4 billion.
As with gasoline, in addition to the increase in total surplus, elec­
tricity price reform also reduces negative externalities. The two major
external costs associated with electricity consumption are CO2 emis­
sions and local air pollution. Using monetary estimates for per unit
external costs (Parry et al., 2014), we estimate the total gain from
reduced external costs to be SAR 0.4 billion. Adding this to the increase
in total surplus derived above yields a total welfare gain of SAR 3.8
billion for Saudi Arabia as a result of residential electricity price reform
in 2018. In the long run, higher electricity prices will likely reduce the
carbon intensity of the fuel mix, thereby changing the external costs of
CO2 emissions per kWh of electricity, but such higher-order, long-term
effects are beyond the scope of this study.
It is helpful to show exactly how many tonnes of CO2 emissions were
avoided due to price reform. Assuming each kWh of electricity savings
prevents 0.6 kg of CO2 emissions that would have been generated by
burning fossil fuels, electricity price reform in 2018 would have resulted
in around 5.6 million tonnes of avoided CO2 emissions in that year.
As noted for gasoline above, these estimates are annual and would
continue to accumulate over time.
4.3. Decomposition of the demand responses
4.3.1. The gasoline demand response
The year-to-year decomposition results for gasoline consumption are
shown in Fig. 7. The black dots in the figure represent the year-on-year
change in gasoline consumption, measured in billion liters, while the
stacked columns reveal the contributions of each factor to that change.
• The population effect was positive for almost all periods. A positive
population effect means that the growing population in Saudi Arabia
contributed to an increase in gasoline consumption. The only
exception was 2017–2018, during which the shrinking non-Saudi
population contributed to a decrease in gasoline consumption.
• The income effect, measured through real GDP per capita, was pos­
itive in many periods, but also negative in some. This may be because
real GDP per capita grew slowly and fluctuated over the last several
decades.
• The UEDT effect was consistently positive. As noted previously, this
is likely due to an expanding road network, urban sprawl, and
limited fuel economy improvements.
• The lagged effect, which captures the impact of changes in income,
population, prices, and the UEDT that occurred in prior periods, was
generally positive.
Fig. 8. Change in residential electricity consumption decomposed into six
contributing factors called effects. Source: KAPSARC analysis.
10
Energy Policy 148 (2021) 111941
• The residual effect (due to the econometric residuals) was found to
fluctuate, with equal positive and negative values observed.
• The price effect was particularly impressive. In most years, gasoline
prices remained flat in nominal terms, and so the price effect was
insignificant. The two periods in which gasoline prices had the
largest impact were those in which gasoline price reforms were
implemented. Between 2015 and 2016, the first wave of gasoline
price reform contributed a 1.3 billion liter decrease to gasoline
consumption. Between 2017 and 2018, the second wave of gasoline
price reform contributed a 1.9 billion liter decrease to gasoline
consumption. This demonstrates that gasoline price reform was the
biggest contributor to the observed 2.2 billion liter decrease in gas­
oline consumption between 2017 and 2018.
4.3.2. The residential electricity demand response
The year-to-year decomposition results for residential electricity
consumption are shown in Fig. 8. The black dots in the figure represent
the year-on-year change in residential electricity consumption,
measured in TWh, while the stacked columns reveal the contributions of
each factor to that change.
• The population effect was a consistent positive driver of residential
electricity consumption growth. As noted previously, the only
exception was 2017–2018.
• The income effect, measured through real GDP per capita, contrib­
uted positively in more periods than negatively.
• The UEDT effect was positive up to 2014. This was likely due to
increasing appliance ownership and limited energy efficiency im­
provements up to 2014. From 2014 onwards, the UEDT effect was
negative, likely due to the wide range of energy efficiency programs
that were launched in the 2010s. Summing the four negative UEDT
effects suggests that these energy efficiency measures may have
helped save roughly 7.7 TWh between 2014 and 2018.
• The residual effect was found to fluctuate, with equal positive and
negative values observed.
• The weather effect contributed to higher consumption in most years,
particularly over the last nine periods as average annual tempera­
tures in Saudi Arabia increased.
• The price effect once again stands out. During most periods, resi­
dential electricity prices did not change significantly, and thus the
price effect did not contribute significantly. However, there was one
exception: 2017–2018. The first wave of electricity price reform in
2016 was minor. In contrast, the second wave in 2018 was more than
substantial. Electricity prices in the first and second segments of
consumption increased by 260% and 80%, respectively, in 2018. The
decomposition analysis revealed a price effect of − 9.1 TWh for the
2017–2018 period, showing that residential electricity price reform
was the biggest contributor to the observed − 13.0 TWh change in
consumption between 2017 and 2018.
5. Conclusion and policy implications
We modeled gasoline and residential electricity demand in Saudi
Arabia using an estimation period that incorporated the energy price
reforms that were recently implemented. The estimated models were
then used to measure the economic and environmental impacts of en­
ergy price reform in 2018 in the Kingdom. The 2018 reforms targetted
gasoline and residential electricity.
Our preferred gasoline demand model revealed that gasoline de­
mand in Saudi Arabia is strongly price and income inelastic, with esti­
mated long-run elasticities of − 0.13 and 0.15, respectively. Studies such
as Algunaibet and Matar (2018) have suggested that as gasoline prices
undergo huge increases, consumers may become more price responsive.
However, we find no evidence of this yet, which is likely due to the
absence of alternative transport options in major cities in Saudi Arabia.
The lack of alternatives points to the importance of providing public
M. Aldubyan and A. Gasim
transport within cities. An efficient public transport system, combined
with gasoline price reform, will allow individuals to shift from passenger
cars to more efficient alternatives. The provision of more efficient al­
ternatives will lead to a bigger response to any future gasoline price
increase and thus the realization of larger economic and environmental
benefits.
Our preferred electricity demand model revealed that residential
electricity demand is also strongly price and income inelastic, with
estimated long-run elasticities of − 0.09 and 0.22, respectively. Despite
the large increases in residential electricity prices due to energy price
reform, our study shows that residential electricity demand remains
strongly price inelastic. Perhaps the need for cooling in a country with a
very hot climate limits the ability of households to respond significantly
to price changes, even when prices go up considerably, given the
absence of substitutes for air conditioning. Therefore, it is likely that in
countries with hot climates and high levels of air conditioning usage,
energy efficiency policies will be needed to manage the growth in resi­
dential electricity consumption. Examples of policies include the intro­
duction and increasing of minimum energy efficiency standards for air
conditioners, policies that are currently being implemented in Saudi
Arabia.
We used the preferred econometric models to conduct a welfare
analysis to calculate the economic impact of energy price reform on
consumers, producers, the government, and, ultimately, on social wel­
fare in the Kingdom. Our calculations revealed that the energy price
reforms in gasoline and residential electricity delivered total market
surplus gains of 2.1 and 3.4 billion SAR in 2018, respectively. Higher
gasoline and residential electricity prices also reduced total negative
externalities by 6.6 and 0.4 billion SAR in 2018, respectively. The
reduction in externalities due to gasoline price reform is considerably
larger, mainly due to road congestion and traffic accidents that are
associated with gasoline consumption only. Adding up the total market
surplus gains and the reductions in external costs, we find that the en­
ergy price reforms in gasoline and residential electricity respectively
delivered total welfare gains of 8.8 and 3.8 billion SAR in 2018 (2.3 and
1.0 billion US$). These gains to the Saudi economy, measured on an
annual basis, would likely continue to accumulate over the years when
compared to a counterfactual scenario in which energy price reform
never occurred.
In Saudi Arabia, the government wholly or partially owns most en­
ergy companies. By applying the direct and indirect shares of govern­
ment ownership for energy companies such as SEC and the refineries, we
can obtain a more accurate estimate of government revenue uplift. Ac­
counting for the shares of government ownership, we find that the en­
ergy price reforms in gasoline and residential electricity increased
government revenue in 2018 by SAR 18.4 billion and 14.4 billion,
respectively (SAR 32.8 billion in total). Part of this revenue gain for the
government was used to finance the Citizens’ Account, the compre­
hensive compensation scheme for lower-to middle-income households.
In 2018, the total compensation paid by the Citizens’ Account to eligible
households for higher gasoline prices, higher electricity prices, and the
introduction of the value-added tax (VAT) was SAR 27.3 billion (Citi­
zens’ Account, 2020). Out of this amount, roughly SAR 19.4 billion was
compensation for higher gasoline and electricity prices only. Thus,
gasoline and electricity price reform generated a total revenue uplift of
SAR 32.8 billion for the government, out of which around SAR 19.4
billion was used to comprehensively compensate lower-to mid­
dle-income households, while still leaving the government with a net
gain of SAR 13.4 billion.
The government of Saudi Arabia, like many around the world, had
long set domestic energy prices below international market levels,
keeping prices stable and energy affordable and thus providing essential
support to lower-income households. However, this encouraged rapid
growth in energy consumption and CO2 emissions, limited incentives to
invest in energy efficiency, and led to foregone revenues for the
government.
11
Energy Policy 148 (2021) 111941
Energy subsidies (both explicit and implicit), once introduced, can
become challenging to remove. As noted by Coady et al. (2018), a lack of
knowledge on the size of energy subsidies and their negative impacts is a
crucial barrier. In this study, we quantified the large economic and
environmental benefits of gasoline and residential electricity price re­
form in Saudi Arabia, a country that had some of the lowest gasoline and
electricity prices globally. Quantifying such benefits can encourage
policymakers in Saudi Arabia to continue reforming energy prices,
particularly for fuels that remain heavily underpriced, leading to the
realization of larger economic and environmental benefits.
Another critical barrier to energy price reform is the negative impact
it has on lower-income households (IMF, 2013). Using part of the gains
from energy price reform to compensate lower-income households can
be critical to the reform’s success (Coady et al., 2018). This study con­
tributes to policy efforts to reform energy prices in similar oil-exporting
countries by quantifying the government revenue increase in Saudi
Arabia, and showing how only part of that revenue increase was needed
to finance a compensation program for lower-income households. Such
compensation schemes are essential for the success of price reform.
In conclusion, our results, which revealed significant economic and
environmental benefits from energy price reform in Saudi Arabia, are
not only important to Saudi policymakers, but also to policymakers in
other countries that are considering energy price reform. By communi­
cating the benefits of energy price reform and implementing a program
to minimize the adverse effects of higher energy prices on lower-income
households, policymakers can successfully reform energy prices. Energy
price reform with appropriate compensation mechanisms will be critical
for improving economic efficiency and mitigating climate change while
protecting the basic energy consumption needs of economically
vulnerable people.
CRediT authorship contribution statement
Mohammad Aldubyan: Formal analysis, Validation, Writing -
original draft, Data curation. Anwar Gasim: Conceptualization, Meth­
odology, Formal analysis, Validation, Writing - original draft, Writing -
review & editing, Supervision, Project administration.
Declaration of competing interest
The authors declare that they have no known competing financial
interests or personal relationships that could have appeared to influence
the work reported in this paper.
Acknowledgements
We would like to thank Wajdi Assiri, Amro Elshurafa, Golban Al
Gahtani, Jeyhun Mikayilov, and Eric Williams for their helpful feedback.
We would also like to thank an anonymous reviewer for their useful
review and comments.
Our research did not receive specific grants from funding agencies in
the public, commercial, or non-profit sectors.
The views expressed in this paper are those of the authors and do not
necessarily represent the views of their affiliated institutions.
Appendix A. Supplementary data
Supplementary data to this article can be found online at https://doi.
org/10.1016/j.enpol.2020.111941.
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