The government would boost gasoline to parity with varying international prices under the plan, according to a person with knowledge of the matter. At current levels, this could result in a hike of about 80% for octane-91 grade gasoline to about 1.35 riyals per litre (0.36 cents), the person said on condition of anonymity. The government plans to delay increases in other energy prices until early 2018, the person said.
Authorities are expected to make a final decision on the plan in September or October, the person said.
The Saudi finance, economy and energy ministries didn’t immediately respond to requests for comment.
Energy-subsidy reform is a key part of Saudi Arabia’s plan to overhaul the economy, along with the sale of stakes in state-owned entities, including the world’s biggest crude exporter known as Saudi Aramco.
The kingdom raised fuel prices in December 2015 and announced plans for further increases. Authorities have also announced plans for a cash transfer programme that would start before further subsidy cuts to help Saudis cope with the impact as the economy struggles with the worst slowdown since the global financial crisis.
“It is important for the Saudi government to cut subsidies in order to ease pressures on budget deficit,” Tariq Qaqish, managing director of the asset management division at Mena Corp Financial Services in Dubai, said by e-mail. “Not only the transportation and logistics sectors will be affected significantly, any company that is involved in production and needs to transfer their end products to consumers will be affected.”
Removing energy subsidies is sensitive in the region. The slump in revenue from oil exports have left governments with few options as they grapple with rising budget deficits.
Saudi Arabia’s budget gap soared to more than 15% of economic output in 2015 before authorities unveiled a plan to transform the economy and balance the budget by 2020.
The neighbouring UAE became the first country in the oil-rich region to remove subsidies on transport fuel when it began linking gasoline and diesel prices to global oil markets in August 2015. Gasoline and jet fuel would undergo immediate, one-time increases under the Saudi plan, while the government would raise prices of other fuels gradually between 2018 and 2021, the person said.
The government may put a ceiling on increases in diesel and heavy fuel oil to limit any negative impact on the economy, as both fuels are used for power generation and industrial activities, the person said. Electricity rates would rise gradually as power providers passed on at least some of the increase in fuel prices, the person said.
Benchmark Brent crude has lost about 2% this year.
“The government is taking its first step in removing subsidies for some fuel,” said John Sfakianakis, director of economics research at Gulf Research Center. “And over the long term, the economy will become a more efficient user of energy in general, and gasoline in particular.”