UAE oil price deregulation to boost economy, government finances

The UAE’s move to deregulate oil prices will help the country’s economy and boost government finances, the Institute of Chartered Accountants in England and Wales has said.

Under the new move, announced on Wednesday, gasoline and diesel will be deregulated from August 1 and a new pricing policy linked to global levels will be introduced in the UAE.

“Deregulating fuel prices will help decrease fuel consumption and preserve natural resources for future generations,” official news agency WAM quoted energy minister Suhail bin Mohammed al-Mazroui as saying.

“It will also encourage individuals to adopt fuel-efficient vehicles, including the use of electric and hybrid cars.”

According to ICAEW’s regional director Michael Armstrong, deregulating oil prices will also help consolidate government finances.

“The context of sustained lower oil prices means that the UAE has chosen the right period to adjust oil subsidies,” he said.

“As ICAEW’s recent Economic Insight report noted, removing subsidies during a period of subdued global oil prices should mean the inflationary impact will be felt less sharply. The more so as consumer protection is a stated focus of the new fuel price committee,” he added.

Oil prices have fallen around 50 per cent compared to June 2014, mainly due to increasing supply and sliding demand.

UAE officials have stated that the deregulation will cause fuel prices to only increase “slightly.”

“Even though prices should not shift dramatically in the immediate future, the knowledge that households and businesses alike will no longer be isolated from global oil prices through government spending should influence behavior,” said Armstrong.

“Households will start to think about how they can reduce their reliance on fossil fuels in case of future price hikes. Businesses will start to develop energy use strategies in case of market price rises.

“This policy should therefore incentivise reduced consumption – and thereby protect the environment and preserve natural resources – going forward,” he added.

GCC states have traditionally offered heavy fuel subsidies to their residents, causing a sharp rise in consumption.

A report by British think tank Chatham House estimates that the GCC consumes more primary energy than the whole of Africa despite its population being only one-twentieth the size of the continent’s.

However, the Gulf states are looking at weaning away from subsidies – Bahrain announced earlier this year that it will begin cutting subsidies for expatriate residents and companies.

Kuwait has also been reviewing a proposal to cut down subsidies on petrol, water and electricity after the IMF warned of its burgeoning state expenses.