UNNATURALLY COOL83the government’s policy of leaving electricity prices untouched since
1966 has played out. Had prices been indexed to cost, Kuwaitis today
might be using half as much electricity. This is a sobering thought for a
government that constantly struggles to keep up with demand. Else-
where, Omanis might respond to rationalized prices by cutting elec-
tricity demand by a third and gasoline demand by a fifth. Long- run
gasoline demand in Saudi Arabia could drop by as much as a third, if
prices reached 65 cents/liter, or $2.50 per gallon.
These results suggest that subsidies are responsible for roughly a third
of the total demand for electricity and transportation fuel. A full reform
of subsidies, all else constant, would probably bring about significant
reductions in energy demand. Gasoline demand is typically less sensi-
tive to price than electricity, so those declines might be smaller.
Raising prices to world levels, even if it didn’t suppress demand to the
world average, could still provide governments with relief. Reduced
energy demand would slow the unsustainable tempo of building new
power plants and refineries and the fuel purchases required to operate
them. The government could direct this capital elsewhere. Reduced
demand at home would also allow these countries to maintain oil and
gas exports for longer. State budgets would benefit handsomely on both
sides of the ledger. Treasurers would enjoy increased revenues from
higher prices and reduced outlays for capital and operating expenses.
But price reform would not permanently halt increases in energy
demand in countries where growth in population, wealth, and indus-
trialization continues. Because today’s consumption is based on prices
and development decisions made in the past, path dependence on higher
levels of demand— energy- inefficient housing, large residences, the lack
of transportation alternatives— will hinder change. And if rentier theory
is correct, price increases might even tempt citizens to demand demo-
cratic participation in government, which would provide regimes a strong
disincentive to undertaking such reforms.
This hypothetical exercise provides us one further insight: it allows
us to understand the long- term damage caused by energy policies set
in place in the 1970s. In many ways, the Gulf ’s energy demand conun-
drum is a hangover from the euphoria over nationalization and the