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Estimating the Impact of Energy Price Reform on Saudi Arabian Intergenerational Welfare using the MEGIR-SA Model

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  • Frédéric Gonand

    (Chaire économie du climat - Chaire économie du climat, SAPRAT - Savoirs et Pratiques du Moyen Âge à l'époque contemporaine (SAPRAT - EA 4116) - EPHE - École Pratique des Hautes Études - PSL - Université Paris Sciences et Lettres, LEDa - Laboratoire d'Economie de Dauphine - IRD - Institut de Recherche pour le Développement - Université Paris Dauphine-PSL - PSL - Université Paris Sciences et Lettres - CNRS - Centre National de la Recherche Scientifique)

  • F. J. Hasanov
  • L. C. Hunt

Abstract

This paper investigates the intergenerational welfare impact of raising administered retail energy prices in Saudi Arabia, an example of an oil-exporting country with a fast growing population. To achieve this, we develop a dynamic model with overlapping generations (called MEGIR-SA), which we believe is the first empirical application of its type to be developed for an oil-exporting country. The model is used to analyze the effects of the increase in some Saudi administered energy prices implemented at the end of December 2015. In particular, the model analyzes how these price increases might affect the welfare of Saudis through a direct increase in energy expenditures, an indirect rise in Saudi public income stemming from a lower domestic demand for oil that fosters oil exports at a given level of domestic oil production, and a direct increase of the turnover of the energy sector. The two latter effects can be redistributed by the Saudi public authorities to private agents through higher current public spending and/or public investment. The analysis suggests that the increase in end-user energy prices results in a net overall favorable effect on the intertemporal welfare of all households. This mirrors the impact on the income of private agents of the surplus in public oil income associated with lower domestic consumption of oil products and recycled to private agents. Moreover, it is shown that the additional oil income associated with the increase in domestic energy prices tends to be relatively more beneficial to future generations if it is recycled through public investment. This is reinforced if the future price of oil remains relatively low. In a possible future situation of declining oil prices and domestic production, a policy that would help meet the Saudi Arabian objectives may consist of gradually increasing the fraction of the additional oil income that is recycled through public capital spending.

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  • Frédéric Gonand & F. J. Hasanov & L. C. Hunt, 2019. "Estimating the Impact of Energy Price Reform on Saudi Arabian Intergenerational Welfare using the MEGIR-SA Model," Post-Print hal-04488840, HAL.
    • Handle: RePEc:hal:journl:hal-04488840
    DOI: 10.5547/01956574.40.3.fgon
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    Cited by:

    1. Corbier, Darius & Gonand, Frédéric, 2024. "A hybrid electricity-economy model to assess the aggregate impacts of low-carbon transition: An application to France," Ecological Economics, Elsevier, vol. 216(C).
    2. Ahmed Khalifa, Massimiliano Caporin, Michele Costola, and Shawkat Hammoudeh, 2021. "Systemic Risk for Financial Institutions in the Major Petroleum-based Economies: The Role of Oil," The Energy Journal, International Association for Energy Economics, vol. 0(Number 6).
    3. Fakhri J. Hasanov & Jeyhun I. Mikayilov, 2020. "Revisiting Energy Demand Relationship: Theory and Empirical Application," Sustainability, MDPI, vol. 12(7), pages 1-15, April.
    4. Hasanov, Fakhri J. & Shannak, Sa'd, 2020. "Electricity incentives for agriculture in Saudi Arabia. Is that relevant to remove them?," Energy Policy, Elsevier, vol. 144(C).
    5. Durand-Lasserve, Olivier & Almutairi, Hossa & Aljarboua, Abdullah & Pierru, Axel & Pradhan, Shreekar & Murphy, Frederic, 2023. "Hard-linking a top-down economic model with a bottom-up energy system for an oil-exporting country with price controls," Energy, Elsevier, vol. 266(C).
    6. Blazquez, Jorge & Galeotti, Marzio & Manzano, Baltasar & Pierru, Axel & Pradhan, Shreekar, 2021. "Effects of Saudi Arabia’s economic reforms: Insights from a DSGE model," Economic Modelling, Elsevier, vol. 95(C), pages 145-169.
    7. Ghoddusi, Hamed & Moghaddam, Hussein & Wirl, Franz, 2022. "Going downstream – An economical option for oil and gas exporting countries?," Energy Policy, Elsevier, vol. 161(C).
    8. Haider Mahmood & Tarek Tawfik Yousef Alkhateeb & Maham Furqan, 2020. "Oil sector and CO2 emissions in Saudi Arabia: asymmetry analysis," Palgrave Communications, Palgrave Macmillan, vol. 6(1), pages 1-10, December.
    9. Jeyhun Mikayilov & Fred Joutz & Fakhri Hasanov, 2019. "Gasoline Demand in Saudi Arabia: Are the Price and Income Elasticities Constant?," Discussion Papers ks--2019-dp81, King Abdullah Petroleum Studies and Research Center.

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    More about this item

    Keywords

    Energy prices; Oil-exporting country; Overlapping generations; General equilibrium;
    All these keywords.

    JEL classification:

    • F0 - International Economics - - General

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