Economists and policymakers are keen to understand how people respond to increases in energy prices. Some consumers may grumble about rising bills but maintain their current consumption, while others might prioritize cost-saving measures and reduce their energy usage.
A recent study delves into Saudi Arabia’s consumer behavior when it comes to energy costs1. Its findings could provide valuable insights for experts modeling the effects of energy policies and those working to mitigate carbon emissions
“To measure and understand the resource, environmental, fiscal, and economic impacts of price-based policies like energy price reform, it is necessary to first understand the relationship between energy prices and energy demand,” says Anwar Gasim, an energy and environmental economist at the King Abdullah Petroleum Studies and Research Center (KAPSARC), who led the study.
“Further energy price reforms, if implemented, could result in more significant economic and environmental gains, totaling tens of billions of dollars.”
Anwar Gasim
Economists refer to the relationship between price and demand as ‘elasticity,’ which describes how sensitive consumers are to changes in prices. When demand is highly elastic, even a small increase in energy price is enough to produce a large decrease in demand. When demand is very inelastic, a much larger price increase is needed to produce a decrease in energy demand.
This information is crucial for policymakers as many measures to curb greenhouse gas emissions actually seek to increase energy costs, based on the assumption that higher prices will lead to reduced energy usage.
KAPSARC’s study investigates the price elasticity of several sources and uses of energy in Saudi Arabia, including some that have not been analyzed in this way before. “We found that energy demand in Saudi Arabia is generally price inelastic,” Gasim says. “This data is needed to quantify the potential impacts of many price-based policy instruments such as energy price reform.”
Despite the general inelasticity of energy demand in the country, historically low energy prices allowed the Saudi government to implement relatively significant increases in energy prices during reforms in 2016 and 2018. These changes delivered substantial economic and environmental benefits, the analysis shows.
By 2018, for example, the reforms reduced Saudi Arabia’s CO2 emissions by 66.5 million tons. That’s almost half of the country’s first target set under its participation in the Paris Climate agreement.
“We also showed that further energy price reforms, if implemented, could result in more significant economic and environmental gains, totalling tens of billions of dollars,” Gasim says.
Reference
Gasim, A., Agnolucci, P. Ekins, P. and De Lipsis, V. Modeling final energy demand and the impacts of energy price reform in Saudi Arabia, Energy Economics 120, 2023.│Article
