Posted by: Barrak Al-Babtain | May 15, 2009

Kuwaiti Fuel Tax

“Domestic consumption levels are Between 2007 and 2018, we are forecasting an increase in Kuwaiti oil production of 40.9%, with crude volumes rising steadily to 3.70mn b/d by the end of the 10-year forecast period. Oil consumption between 2007 and 2018 is set to increase by 42.4%, with growth slowing to an assumed 4.0% per annum towards the end of the period and the country using 393,000b/d by 2018.”

Kuwait Oil and Gas Report 2009

KD033 Oil Well

Assuming a price average of $50 per barrel and oil production is 2.6 million barrels per day at a negligible cost, Kuwait produces oil that is valued at 13.7 billion KD per year. With domestic consumption at a rate of 0.33 million barrels per day, this means that Kuwait consumes 1.7 billion KD worth of its own fuel every year. We consume 12.6% of our total oil production. That seems to me to be a ridiculously high amount for a nation who’s GDP is made up almost entirely out of oil revenues.

graph(2)

The graph shows the relationship between the value of our consumed oil (1.739 billion KD) and our exported oil (12 billion KD). As you can see our domestically consumed oil amounts to around 12.6% of our total oil produced. This is the oil that is refined into petrol domestically and sold to consumers in petrol stations around the country.

graph(3)

This chart shows how Norway (values in USD) consumes less oil at home than we do in Kuwait. The dotted line represents the level of the Kuwaiti consumption. As you can see the Norwegians manage to reduce their percentage of oil consumption to nearly a half of what we do in Kuwait. The extra oil we consume does not give us any increase in our quality of life. All it does is make it easier for us to endlessly drive our cars, clogging the streets up, make parking a nightmare and fill the air with pollutants. The Economy Intelligence Unit’s Quality of Life index shows Norway to be at 8.05/10 compared to Kuwait at 6.171/10.

09-03-Kuwait Petroleum Prodxn & Consxn

  • What? Restructuring the way wealth is redistributed through fuel subsidies
  • Why? Lower fuel costs encourage wasteful driving and discourages transportation alternatives
  • How? Abolishing the fuel subsidy and replacing it with a fuel tax rebate for the Kuwaiti workforce.

The oil that is consumed domestically is obviously not given away for free. It is sold back to consumers at a heavily subsidized rate. It is this subsidy that I believe should be restructured in a way that would provide smarter benefits to Kuwaiti citizens. Instead of giving away the oil for practically nothing and allowing people to waste it without not knowing its true value; I propose that the subsidy be abolished and the revenue generated from the domestic oil sales be given back to citizens as a form of energy tax rebate. What this means is that the price of a gallon of petrol would rise to 5 times its current level. A full tank of gas that cost me 5KD would now cost 25KD. This is because I am now paying for the true value of this commodity and the government is not losing any money because it is selling it to me and not Japan. This also means that the government is making 5 times as much money from its domestic sales as it did before. This extra revenue will be given back to all the Kuwaiti workforce as a form of energy rebate. The mechanism is already in place for most citizens working for the public and private sector.

petrol1

Let’s assume that the average Kuwaiti spent 50KD on petrol per month. Some spent less, and some spent more. At the end of the month, the average monthly energy expenditure for Kuwaiti citizens is calculated and that figure is given back to all Kuwaitis equally. This means that the person that spent 50KD will get 50KD added to his paycheck for that month. A person that spent 10KD for petrol will also get 50KD thereby rewarding him with a 40KD profit for his efficiency. A person that spent 200KD will get 50KD also which means his real energy expenditure was 150KD for the month, a punishing amount that will force anyone to reconsider their driving habits. This mechanism of reward and punishment will force us to behave differently because of our financial self interest, and not out of love for the environment or desire for less congestion, even though that will be the end result.


Responses

  1. I find your proposal for a fuel tax rebate very interesting. But, as always, the devil (or god) is in the details. As someone who has spent seemingly countless hours pursuing (seemingly) most trivial formal request (various aspects of the residence permits, stamps from various ministries, permit and signatures from various obscure officers, etc. – why they can’t synchronize the locations and functions of these various ministries/ offices is still beyond me?) it’s imperative that the outcome of such an intervention simplifies or improves a previously unfair, cumbersome or unsustainable situation rather than the reverse. Thus, as with a number of aspects in Kuwait (traffic regulation, employment, human rights, etc.) it comes down to implementation, supervision and enforcement. If a proposal is not designed to accommodate real life conditions it will always remain a hypothesis. If it is not correctly supervised, it cannot be understood or any required changes will not be implemented. If it is not enforced, and the ‘penalties’ of breaking such ordinaces aren’t well understood by those to whom they apply, they won’t be followed…

  2. Yes, the whole point of this intervention is to incite some sort of behavioral change that would lower overall car usage. People respond to incentives, yet if they don’t understand the benefits, or cannot perceive the negative externalities of their actions then it’s useless.

    I want people to understand that by driving around aimlessly, you’re not only wasting your time and your nations’ natural resource, but you’re also polluting the air and causing unnecessary traffic. I want people to have a clear incentive into buying a fuel efficient car; not only because it will save them money, but because it will result in less pollution and more government oil revenues. If you want to waste resources by buying a Hummer and driving around all weekend, then you have to pay for all the negative externalities that we all take for granted.

    The way I see it is that the fuel subsidy be gradually reduced year by year until it is eventually abolished. Also, all cars should have both the mileage and the expected annual fuel cost for running the car as well. So when you buy a car, you not only see the sticker price; but the average amount of money you would be expected to pay in fuel costs. The added revenue generated by abolishing the subsidy would go into improving existing mass transit and investing in alternative means of transportation. Of course, people will complain that they’re being ripped off by the government and that their quality of life is being reduced, so a salary hike is to be expected as well. This might cause some inflation to occur, but the incentive to be efficient motorists remains.

    Of course, this mentality should not be limited to gasoline. It has to be a complete energy solution, as electricity is abused just as much, if not more than gasoline. Any revenue from this would go into investing in a Smart Grid infrastructure which would further reduce waste and increase efficiency. I’m planning a post on this subject soon, hopefully with more details than this Fuel Tax post.

  3. Sounds great! Have you thought about expressing these through any more public (generic) mediums than a blog (which usually are followed by those already (semi) converted)..? The English Al-Watan usually seems quite receptive to potentially polemic ideas…

    Some other alternatives for more public forums might be publications, presentations (a la Dar Al-Athar – but dealing with contemporary issues), one day symposiums (mini-conferences a la AA), and even something a bit more ambitious… We need to be the ones taking the initiative in starting to generate an interest (concern) regarding these matters on a more, ideally nation wide, level, and do so by moving the discourse beyond just raising the concerns to a realm where solutions are provided (something your blog-entry does), and provide such solutions in a way that accepts the multi-dimensionality and challenges that all such resolutions entails…

  4. […] way to do this is by having an energy rebate. This was mentioned before in greater detail here and here. The government will have made 4 times as much money selling domestic petrol than it would have. […]

  5. Barrak a really interesting post!! I wish this will be implemented soon..


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