Glada Lahn

The Gulf region is a test case for one of the most serious questions of our time; how can we turn around damaging models of resource use when they are so ingrained in our economies and societies?
The six countries of the Gulf Cooperation Council are often painted as a miracle made possible by oil wealth: grand designs and profligate consumers in land scarce in fertile soil and rainfall. But the urban sprawl, leisure developments and industrial complexes that have sprung up in the last 40 years are devouring the resources below ground at an increasing rate.
Plentiful cheap water and energy have underpinned this boom, but resulted in economic and built infrastructures which push demand for depletable resources ever higher. On current trends, Gulf countries will become increasingly dependent on imports, not only of food and so called ‘virtual water’ embedded therein, but also – with the exception of Qatar – gas. Governments know this is a risky path to tread. It relies on a willingness to pump a growing share of oil revenue into funding the gap between imported product and domestic prices, while burning a hole in the legacy for future generations.

Wasteful practices
Population in the Arab Gulf has doubled in the last 30 years. High birth rates have been boosted by an increase in expatriates who now account for some 90% of residents in Qatar and the United Arab Emirates. With the oil price boom of the last decade influencing energy and water consumption and dietary habits, this has resulted in several unsustainable trends.
Desalination capacity must grow faster as ground water resources are depleted, draining oil and gas and increasing salinity of the Arabian Gulf. In the UAE, non-renewable ground water resources are on track to run out within 50 years. In Saudi Arabia some aquifers are already dangerously low – even the springs of the famous Al-Hasa (Al-Ahsa) Gardens in the Eastern Province have dried up and must now be watered with waste water. Even neighbouring Iran and Iraq expect severe water shortages in the coming decades as a combination of population growth, upstream development, excessive hydro-engineering and climate change take their toll on river flows.
Waste is ubiquitous. According to local sources, as much as 40% of desalinated water supplies can be lost in distribution in Saudi Arabia. Very little water is recycled for secondary usage e.g. for irrigation and washing throughout the region. In Iraq and Iran, both hamstrung by inadequate and inefficient power generation, enough gas was flared in 2012 to supply Poland, Greece and Bulgaria. In addition to gas, Saudi Arabia – a country with huge solar power potential – burns over half a million barrels of its precious oil a day to produce electricity with more poured into inefficient generation plants to keep buildings cool in the summer months. Food waste is also high; of the 7000 to 8000 tonnes of municipal waste generated every day in Dubai alone, over one third is estimated to be food.

The food-water-energy nexus
These resource trends have intertwined consequences and exemplify the “food-water-energy nexus” which has become a focus for global concern. In Saudi Arabia, for example, large farm subsidies – and low diesel prices – have aided the rapid depletion of Saudi Arabia’s once massive groundwater resources, increasing reliance on fossil fuel powered desalination to make seawater drinkable. The sensible move to phase out wheat subsidies is stemming the loss of ground water but with diesel for ground water pumping still amongst the cheapest in the world and water unpriced, some farmers have turned to alfalfa production – an even more water intensive crop – for animal fodder. This is chiefly to feed dairy herds producing milk that is sold at a price far below the value of the quantities of the water and energy that is used to produce it. Experts estimate that it can take 1000 litres of water to produce one litre of milk in the kingdom, yet the price is about $1.
Once demand in one resource exceeds national availability, it can impose costs on other resources. In the UAE for example, rising gas imports are pushing up water production costs. Across the GCC, wasted water is effectively oil and potential food swilled down the drain. And impacts are not only on the public purse but also on health as obesity soars following a dramatic shift over the last 50 years from local grains and vegetables to meat, dairy and high sugar consumption and air pollution rises.

The illusion of plenty
These are global problems in an extreme setting. This means the world should be watching how Gulf countries deal with them. In the case of the GCC countries, the ‘illusion of plenty’ drives excessive consumption and inefficiency and this is closely connected with prices that reflect neither scarcity nor the negative impacts of use – such as pollution, asset depletion or greenhouse gas (GHG) emissions. It is now more widely understood that people are not even paying the relatively low costs of national production for their power and water. In Saudi Arabia for example, the National Commercial Bank of Saudi Arabia (NCB/Bank Al-Ahali) estimated direct subsidies to consumers of public sector desalinated water at SR5.5billion ($1.5 bn) in 2011. This would be much more if indirect costs of energy were included. In Kuwait, a 2 fils ($0.01)/kilowatt hour electricity tariff fixed since 1966 means the government pays for over 90% of the costs of production.
Comparatively low fuel costs mean that some countries are making a double loss; in Saudi Arabia and Iraq for example, large volumes of diesel are smuggled over the border to countries with higher prices (Jordan, UAE, Yemen).

Ballooning subsidies, alarming rates of resource depletion and smuggling have prompted some serious efficiency initiatives, with particular focus on upgrading building and appliance standards. Price too is on the agenda. At a petroleum conference in November, the Omani Minister of oil and gas declared “We are wasting too much energy in the region…what is really destroying us right now is subsidies… we simply need to raise the price of petrol and electricity.” Many other officials agree in private; electricity and water prices have been raised significantly in Dubai, but the issue of fuel price reform is a sensitive one: why should such large producers of oil make their people pay for fuel? Although average wages in the GCC states are far higher than many countries with higher energy prices, the political context in which leaders aspire to play a providing role makes charging for resources more difficult.

Billions of $ savings at stake
Over the last five years, my colleagues and I at Chatham House have listened to concerns about consumption patterns amongst a wide range of experts in the Gulf. A report based on their work and international experience will next month argue that countries must begin by assessing the costs of current resources. A ‘reference’ or ‘shadow’ resource price could allow government planners to measure the savings available from different investments and policy measures to help decide what is worth investing in today to save tomorrow. The economic case is already clear for many. Calculations we published in August show that with fairly basic efficiency measures, Saudi Arabia could be saving between 1.5 and 2 million barrels of oil equivalent per day by 2025 – a saving of around $36billion a year even at $80/oil and $20/barrel of oil equivalent gas. More detailed studies by authorities in Abu Dhabi show that a comprehensive cooling plan could free up 2 nuclear power stations worth of electricity by 2020.

Reflecting resource value in price
If governments decide to pass on some of the resource costs to consumers, they must research which groups would be adversely affected by higher prices and how a rise in one commodity (say petrol) would affect the price of others (e.g. food). There are also opportunities to consider: How can savings from reduced support fund development and jobs? And what new private sector investment could higher prices attract? Dubai for example is encouraging a nascent energy services market – only made possible because of the higher electricity and water prices.

Raising prices will create winners and losers, and this raises further questions about the capacity of governments to navigate the political minefield of reform and implement measures effectively and equitably. Public trust in government and administrative effectiveness are key to the design of public spending programmes to manage the transition to higher resource prices.

If people think that they will lose out while government officials partake in graft, then they will object. This may well be the case if the compensatory measures appear too complex. In this case, there is logic in a universal transfer scheme whereby citizens receive an equal share of a percentage of the savings. This is what Iran did in 2010 and there is much to be learned from that case. In the event, cash handouts were set too high with insufficient amounts left to compensate vital industries such as electricity utilities. But people generally accepted the trade-off which, given the violent reactions to fuel price rises in countries such as Nigeria and Bolivia, is no mean feat.
Iraq and Jordan have both accompanied fuel price increases with transfers to poorer households. In both cases, it has been a learning curve. When Iraqi Ministry of Labour officials were found to be helping themselves to the welfare pot, the system was decentralised and computerised to reduce options for fraud. International experience shows that the flexibility to revise and improve a scheme is essential to its success.

In the GCC countries, the challenge is more about public perceptions and vested interests than hardship. As the Saudi minister of water and electricity, Abdullah Al-Hussayen, has pointed out, people pay SAR200 ($53) a month for their mobile phone bills, yet less than SAR1.00 ($0.27) a month for their household water. Also, it is the total cost of the household electricity or water bill that really matters to consumers, rather than the cost per kWh or litre. This is something that can be made manageable, especially for low-income families, through the use of ‘life-line’ tariffs (that provide a sufficient supply at an affordable rate, but charge more beyond this) and efficiency investments.
And the cost of mobility would have to rise quite a bit to pinch the average citizen. A back of the envelope calculation shows that 90 litres of petrol (one tank for a typical SUV) at current national prices would amount to less than 1% of average monthly public sector salaries in Bahrain, Qatar, Saudi Arabia and the UAE. This compares with around 3% in the United States and 11% in the UK. The flip side of this is that moderate price rises may have little impact on personal driving habits without additional regulation and awareness campaigns. Commercial enterprises where energy represents a significant share of the input will be more responsive. Haulage companies and farmers for example pay even less than households for diesel; a gradual rise from say 6 or 8 cents a litre in Saudi Arabia to the UAE price of 65 US cents a litre would be a loud wake up call for more efficient practices.

From waste into jobs
No country in the world values all its vital resources – such as water, food, energy, fresh air and the diversity of our animal and plant life – adequately. This means businesses and governments continue to make ill-judged policy with respect to future generations and increasingly, current ones too. But there is growing recognition globally that we ignore value at our peril.
In the Gulf, current high inefficiencies and waste create a huge financial and job creation opportunity. Our research and conversations with a wide range of local and international experts, policy makers and business people show there are innovative responses available to governments to take a more secure consumption path. Some are embarking on that path and proving valuable examples for their neighbours.
Frankness in discussing food, water and energy subsidies in the region is a welcome development; but the challenge also demands a new narrative based on national interests such as sustainable job creation and care of national assets such as water, oil and gas, clean air and marine life. The starting point is to know how much is being lost, wasted and foregone through current systems of production and use. From here societies can debate how state support might be more fairly spread.

Glada Lahn is a Senior Research Fellow in the Energy, Environment & Resources Department at Chatham House in London. She has co-authored the report on Valuing Vital Resources – to be published in June 2014 – and Saving Oil and Gas in the Gulf – now available in Arabic