DUBAI: United Arab Emirates has become the first Gulf state to take a major step towards taming the gas-guzzling habits of its drivers, who see cheap fuel as part of their birthright.
The UAE said it would raise domestic prices for gasoline and cut them for diesel in a politically sensitive reform designed to save it money and encourage fuel efficiency.
State subsidies have long kept domestic fuel prices at some of the lowest in the world – part of the welfare packages which Gulf governments offer in their drive to maintain social stability.
This has led to a preference for huge sports utility vehicles, and the subsidy costs have become harder to bear for governments since last year’s global oil price plunge slashed energy export revenues.
The International Monetary Fund projects the UAE will post its first fiscal deficit this year since 2009, and estimates the country spends $7 billion annually on petroleum subsidies.
So this month, the UAE said it was shifting from a system of fixed, subsidised fuel prices to one of adjusting prices monthly in response to global trends. It did not reveal details of its new formula or say whether subsidies would be removed entirely, but announced that prices would be “based on the average global prices with the addition of operating costs”.
The price of a litre of octane 95 gasoline will climb 24 per cent to 2.14 dirhams (58 US cents) at the start of August, while diesel will fall 29 per cent to 2.05 dirhams, state news agency WAM reported on Tuesday.
The moderate size of the price changes suggests there will be little immediate impact on domestic consumption. Demand in the UAE has more than doubled since 2009 to reach almost 400,000 barrels per day last year, according to the Joint Oil Data Initiative which compiles figures from governments worldwide.
Consultants at Strategy& said the changes were unlikely to have a big impact on UAE inflation or economic growth, as cheaper diesel would offset more expensive gasoline.
But the new system appears to pave the way for substantial fuel price hikes in future if Brent crude, now below $53 per barrel, near six-year lows, eventually starts to recover.
The system “will help decrease fuel consumption and preserve natural resources for future generations”, UAE Energy Minister Suhail bin Mohammed al-Mazroui said last week.
“It will also encourage individuals to adopt fuel-efficient vehicles, including the use of electric and hybrid cars.”
The reform puts the UAE at the forefront among Gulf states in pushing through reforms to curb spending and raise new revenue in an era of cheap oil. Abu Dhabi, the UAE’s biggest emirate, hiked electricity and water tariffs in January.
