FROM ENERGY POVERTY TO ENERGY EXTREMISM 57TAXES, RENTS, AND THE ROOTS OF SUBSIDIESThroughout the Gulf monarchies, the 1973 oil windfall marked the
beginning of a new approach to rule, one characterized by bountiful
social welfare benefits. The sheikhs began to provide their subjects with
land and homes. They distributed high- paying jobs in the bureaucracy,
and they tilted foreign- investment laws to force foreign investors to give
ownership shares to citizens. Prominent families— particularly those
viewed as political opponents— were richly rewarded. Many of these
received exclusive licenses to import and sell foreign goods— Toyota cars
and trucks, Frigidaire refrigerators, Westinghouse air conditioners.^14
The huge jump in oil rents in 1973 allowed Saudi Arabia to dismantle
its tax bureaucracy. The kingdom liquidated much of its Department
of Zakat and Income Tax and abolished the few taxes previously imposed
on Saudi citizens, including cigarette taxes. The government even stopped
collecting social insurance contributions. For good measure, the state
abolished foreign residents’ income taxes and gave foreign businesses a
five- year tax holiday.^15 The bounteous oil wealth arriving from overseas
meant that the state no longer needed to raise any income from society.
Abolishing taxes allowed the Saudi government to preempt future “no
taxation without representation” demands by Saudis interested in voting
or otherwise getting involved in governance.
And, crucial for our story, kingdoms began to subsidize energy ser-
vices such as water, electricity, and transportation fuel. What constitutes
a subsidy? The IEA and OECD definitions say that subsidies are “any
measure that keeps prices for consumers below market levels” and “any
government action that concerns primarily the energy sector that low-
ers the cost of energy production, raises the price received by energy pro-
ducers or lowers the price paid by energy consumers.”^16 Perhaps the
most applicable subsidy definition for this book is the “price gap,” the
difference between a commodity’s local selling price and the price it
would have fetched across the border— that is, its opportunity cost.^17
Table 4.1 shows overall outlays for the world’s top- ten subsidy provid-
ers; all six Gulf countries make the list.^18