Impact of Pricing Policy Changes on Gasoline Domestic Demand in Saudi Arabia: An Analytical Study of Al-Ahsa Governorate

(Abeer Abdulla Kinawy, Hafsa Ali Morci and Olfat Ali Melok)

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Abstract

In Saudi Arabia, the price of fuel products is one of the lowest in the world due to the adopted subsidizing energy price policy. In addition, Saudi Arabia is the largest consumer of fuel in the world with annual increasing rate of 8% per year. This is reflected in inefficient use of resources that can be used in developmental projects to enhance economic growth. This paper aimed at identifying the main causes of increasing gasoline domestic demand by estimating the demand function at national level using secondary data (time-series data), and at Al-Ahsa governorate level using primary data (questionnaire). The study used double log multiple regression model and Chow test. The estimated model was used to predict the effect of partial or total removal of gasoline subsidy on gasoline consumption. The study reveals that, the numbers of private cars, roads lengths, real price of gasoline and real income are the main factors affecting gasoline consumption. In addition, it shows that gasoline demand is inelastic, according to demand price elasticity. Moreover, the study indicated that the change of gasoline price policy would be to some extent an effective policy to rationalize consumption. Hence, an increase in real price of gasoline by more than 100%, would lead to a decrease in consumption by more than 25%. Based on its result, the study recommends compensation of low-income families, being the most affected, in case of reducing price subsidy of gasoline in addition to reducing domestic consumption of gasoline. The study recommends the expansion of public transportation within and between the Kingdom governorates Key Words: AL-Ahsa, Chow test, Gasoline consumption, Prediction, Pricing policy, Theil’s μ-statistic.
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