Kuwaitis seeing increases in gasoline prices

Kuwait is making large increases in its subsidized gasoline prices, with Gulf Business reports showing the price of low-octane gasoline rising 41 percent, high-grade gasoline prices rising 61 percent and some types of low-emissions gasoline spiking 83 percent. 

The World Bank's country manager for Kuwait characterized the price hikes as “politically and economically bold,” and the response on the street is less positive as frustrated Kuwaitis sit in long lines at gasoline pumps and contemplate a future where getting anywhere is going to cost a lot more.

The nation's taxi drivers, meanwhile, are taking a look at new government-generated price lists that will help them offset some of the higher costs they face. On Sept. 1, the Kuwait Interior Ministry Acting Assistant Undersecretary for Traffic Affairs Fahd Al-Shuwaei demanded that drivers use the new prices and stick to the meter when transporting passengers, outlining penalties for violations that include impounding a vehicle for up to two months.

What’s behind the price changes?

Bruce Brunton, an assistant professor of economics at James Madison University, told Gulf News Journal  price increases for state-subsidized goods or services are often the result of government budget pressures, such as the ones that Gulf nations now face due to declining government revenues caused by much lower international oil prices.

 Brunton also talked about how subsidies distort market values.

“When anything is artificially cheap, it tends to get overused.” Brunton said. “When the government-set price is way below the supply-and-demand determined market price, people buy more, that is just the law of demand.”

Then when people get used to those low prices, it's a great economic shock when they suddenly have to pay a lot more, Brunton said.

Brunton cited recent events in Argentina as an example, where the government reduced subsidies on electricity by a wide margin.

“They're out banging pots and pans.” Brunton said, citing coverage in The Economist showing popular dissent in a country where a traditional demonstration method involves getting kitchen implements and banging on them in the street. “They're going to complain about it.”

One alternative, Brunton said, is to let prices be largely determined by market forces and take other avenues toward giving citizens benefits from the country’s oil wealth that don’t involve subsidies.

Brunton pointed to the case of Alaska, where instead of subsidizing gasoline prices, the state cuts citizens a check for a share of crude oil revenues.

“It's about trying to achieve a balance between equity and efficiency.” Brunton said.

As Kuwait continues to make the big adjustment to higher gas prices, officials are assuring citizens that the price increase will not affect a range of basic commodities. Still, the government is likely to have to make efforts to deliberately adjust various other market prices or otherwise mitigate the impact of pushing the price of a domestic staple high above what it was just a short time ago.