Lowering Saudi Arabia's Fuel Consumption and Energy System Costs Without Increasing End Consumer Prices

Saudi Arabia aims to reduce the growth of its energy demand. This paper shows how to substantially reduce the current fuel consumption and economic inefficiencies in the Saudi energy system, without altering consumer prices. We use the newly-developed KAPSARC Energy Model, a multi-sector equilibrium model of the Saudi energy economy that handles administered prices in a mixed-complementarity formulation. We present results from a set of scenarios that illustrate some of the possible policy options available to the Kingdom. Some of these scenarios are the solutions to Mathematical Programs subject to Equilibrium Constraints (MPEC's) that maximize the net economic gain for the Saudi economy. The policies examined would have potentially generated economic benefits exceeding 23 billion USD in 2011, or about 4% of Saudi Arabia's GDP. This economic benefit comes mainly from inter-sectoral fuel pricing policies that incent shifting the mix in technologies that generate electricity and produce water. We show that when complemented by credits for investments in solar and nuclear power generation capacities, a modest increase in the transfer prices of fuels among sectors would produce economic benefits close to those achieved by deregulating transfer prices. An implication of the results is that through its domestic energy policies, Saudi Arabia can disconnect its energy-consumption growth from GDP growth