UNNATURALLY COOL77subsidy portion grew over time to become a major burden on govern-
ment budgets.
While the initial motivations were sound, the system of energy pricing
in the Gulf lacked foresight. Once fixed, prices that might have covered
costs in the 1970s or 1980s stagnated or were reduced. Bahraini electricity
prices started out in 1961 at 10 fils (2.7 US cents) per kilowatt- hour (kWh)
and were cut in half in 1974 after the oil embargo produced windfall prof-
its.^18 By 2005, Bahrain was selling power for an average of 5.4 fils per kWh,
less than half of its breakeven cost (13.5 fils).^19
Residential electricity prices in Saudi Arabia have been reduced six
times since 1950. By 2015, Saudi electricity sales revenue covered just
17 percent of costs.^20 Kuwait was even worse off. Electricity costs have
been fixed at 2 fils (0.7 US cents) per kWh since 1966; by the Kuwaiti gov-
ernment’s own estimates, customer payments in 2017 covered less than
5 percent of the cost of providing electricity.^21 Transportation fuel prices
followed the same trajectory. None of the Gulf states indexed prices to
inflation. Saudi Arabia actually reduced gasoline prices twice, first in
1992 and again in 2006, when policy makers felt that high oil revenues
required a grand gesture from the king.
Over time, the gap between sales revenues and the cost of provision
of energy products grew into a chasm. By 2014, spending on energy
subsidies reached 9.5 percent of GDP in Saudi Arabia, 4.4 percent in the
UAE, 5 percent in Kuwait, and 9 percent in Oman.^22 As a portion of the
total economy, that’s more than the 3.3 percent of GDP that the United
States spent on defense in 2015. Gulf citizens often had no idea that the
government was paying for their energy benefits.
The downside of subsidies went well beyond the expense and difficulty
of expunging them. For oil exporters, subsidizing oil amounted to eco-
nomic cannibalism. On average in the Gulf, oil export revenues cover
roughly 80 percent of government budgets and provide about 40 percent
of GDP. Subsidies threatened that revenue stream by encouraging domes-
tic demand for oil— oil that would fetch a much higher price abroad.
The revenue lost by distributing oil at home rather than selling it abroad
is its opportunity cost. For Saudi Arabia, the opportunity cost of subsi-
dizing oil at home can be enormous. It was nearly $30 billion in 2015