Zero petrol subsidy to pump up UAE economy

Dubai - Ministry to decide fuel prices based on global average on 28th of every month.

The UAE will deregulate retail petrol prices from August 1, effectively ending an era of cheap fuel enjoyed by residents on the back of heavy government subsidies.
In one of the boldest economic reform initiatives in the GCC, the UAE will implement a new flexible pricing policy linked to global prices, which in effect could raise the price of petrol from the Dh1.72 per litre - now far below the prevailing average global price of Dh4.44 per litre.
While the new pricing formula linked to global prices will likely translate to higher fuel cost to motorists, an expected fall in domestic diesel prices will help ward off anticipated inflationary pressures.
The UAE Ministry of Energy said on Wednesday it would decide on the 28th of each month fuel prices for the following month on the basis of an average of global prices. In line with this decision, prices of petrol and diesel for August will be announced on July 28, based on the average global prices with the addition of operating costs. The ministry, however, did not give details of the pricing formula or indicate whether prices would rise all the way to global levels.
Suhail bin Mohammed Faraj Al Mazroui, Minister of Energy, said given the international prices of oil and petroleum derivatives, domestic diesel prices are expected to go down. "This will stimulate the economy as lower diesel price would mean lower operating costs for a wide number of vital sectors like industry, shipping and cargo among many others."
Al Mazroui said the move to free up fuel prices is aimed at supporting the national economy, lowering fuel consumption, protecting the environment and preserving national resources.
Fuel prices in the UAE are currently among the lowest in the world because of heavy state subsidies. Allowing prices to move more freely would reduce pressure on the state budget and could be one of the UAE's biggest economic reforms in recent years. The GCC countries have been under mounting pressure from international agencies and the World Bank to scrap state subsidies and get fuel prices on par with the global prices.
The International Monetary Fund (IMF) said in a report released on Monday that the UAE, the second largest Arab economy and the world's seventh largest oil producer, has been spending $29 billion a year subsidising petroleum products and electricity.
At present, petrol retail price for 95 octane is Dh1.72 per litre and Dh1.83 for 98 octane in the UAE retail market, which is currently the 15th lowest in the world but the highest in the GCC following a hike of 35 fils per litre in 2010.
According to energy experts, in the UAE, where fuel use per head is among the highest in the world, the government along with retailers has been subsidising petrol by more than Dh1.2 per litre. This is without taking into account the costs of importing the refined product, storing, distributing, marketing and eventually dispensing it to the consumer. But the World Bank figures show that standard grade gasoline sold at Dh1.72 ($0.47) per litre in the UAE is less than half of the global average price of $1.21 (Dh4.4) a litre. This means that the local UAE fuel retailers, which have to import refined fuel at international prices, are incurring a loss of 74 fils per litre (Dh2.66).
"The decision to deregulate fuel prices has been taken based on in-depth studies that fully demonstrate its long term economic, social and environmental impact. The resolution is in line with the strategic vision of the UAE government in diversifying sources of income, strengthening the economy and increasing its competitiveness in addition to building a strong economy that is not dependent on government subsidies. This step will put the UAE on par with countries that follow sound economic methodologies. It is also anticipated to improve the UAE's competitiveness while positioning the nation on international indices," Al Mazroui said in a statement.
The minister argued that deregulating fuel prices would help decrease fuel consumption and preserve natural resources for future generations. It will also encourage individuals to adopt fuel-efficient vehicles, including the use of electric and hybrid cars. It will also encourage the use of public transport.
Al Mazroui explained that the transport sector was responsible for 22 per cent of the total greenhouse emissions in the UAE in 2013 amounting to 44.6 million tonnes of carbon dioxide. "Given this stark reality, increasing the use of public transport and reducing dependence on individual vehicle usage will have a positive impact in lowering carbon emissions. In this regard, the UAE has an advanced public transport system with options that are environmentally friendly such as taxis that work on natural gas."
The minister pointed out that the cost of petrol represents three to four per cent of average income in the UAE, which is a reasonable percentage compared to international costs. "Consequently, deregulating prices would not have a notable impact on individuals' costs of living."
Al Mazroui said the move would contribute positively to the UAE's investment environment, enhance its economic competitiveness, and support the policy of a free-market economy with no direct interference from the government. Stating that the deregulated fuel prices will also lead to a sustainable economy that is based on open market standards, he said the decision will further strengthen the UAE's status as an attractive destination for foreign investments, complementing its advanced legislative economic environment, state of the art infrastructure, ease of conducting business, free movement of capital, and other competitive features that set the country's economy apart from others.
Dr Matar Al Nyadi, Undersecretary of the Ministry of Energy and Chairman of the Gasoline and Diesel Prices Committee, said that the role of the Ministry of Energy and Ministry of Finance as the government's representatives in the committee would focus on consumer protection and ensure that petrol prices are balanced according to international standards. He added that the pricing mechanism is structured in a way that it does not rely on just one global market and will facilitate distribution companies to make reasonable profits and limit their losses while offering premium services.
Al Nyadi said that the committee would urge distribution companies to increase their operational efficiency to lower their costs, and eventually positively impact the prices of petrol and diesel at petrol stations. He added that the committee would hold periodic meetings and monitor global prices.
According to fuel price comparison website GlobalPetrolPrices.com, the average price of petrol around the world was found to be $1.04 per litre but various levels of taxation and subsidisation led to different pricing levels. World Bank puts the average global price of petrol at $1.21 a litre.
While Venezuela has the world's cheapest petrol price, Gulf countries, which are among the world's top crude exporters, are in the list of countries selling petrol at the cheapest rates. Saudi Arabia sold petrol at the fourth cheapest rate globally while Kuwait had the sixth cheapest price in the world. Bahrain and Qatar were also among the top 10 countries offering cheap petrol while Oman and the UAE (15th) were placed further down the list.
issacjohn@khaleejtimes.com