George Sarraf, David Branson, Dr. Yahya Anouti
October 16, 2016
Gulf Cooperation Council (GCC) countries1 should reform how they price domestic natural gas in order to incentivize upstream gas investments. The prevailing regime of low and fixed prices — which power producers, downstream industries, and consumers have enjoyed for decades — is unsustainable. Reforms should define a mechanism that prices natural gas closer to its true market value and that in some manner reflects the global and regional dynamics of supply and demand. As a consequence, prices will inevitably increase and can have an adverse socioeconomic impact on consumers. These effects can, and should, be mitigated by offering incentive packages to industrial customers and instituting targeted compensation mechanisms for the poorest households. A regulator for gas should be established to govern the new gas-pricing regime and monitor its application. The time to act is now, while oil prices are low and reducing gas subsidies will have a less severe impact on the region’s economies.
Although a regime of low fixed gas prices in the GCC has proven beneficial over the past 30 years, it is unsustainable. A new price regime is required to bring supply and demand into balance, and to avoid economic inefficiencies and distortions. Some countries have already taken steps in this direction but more is needed to advance this vital reform across the region. Although a new regime will result in higher gas prices, carefully crafted mitigation measures can help with the transition. These will allow the economy as a whole to benefit from increased diversification, private investments, true competition, and a greater sense of energy security.
1 The GCC countries are Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates.