UAE's new petrol price: Why change not in phases

Following last week’s announcement regarding deregulation of fuel prices in the UAE starting August 1, 2015, the Ministry of Energy will today [Tuesday, July 28] announce the new price of petrol and diesel in the country.

The ministry’s move to deregulate the fuel price came as per a decision issued by the UAE Cabinet based on a study submitted by the ministry.

Several residents and some media outlets began speculating the revised price on social media immediately after the ministry’s announcement last week regarding linking local prices at the pump to global oil prices.

The ministry has since clarified the reasons behind the move, as well as explained that a fuel price committee has been set up to determine and monitor the fuel prices in the local market.

The committee, which includes representatives from the Ministry of the Energy, Ministry of Finance, Adnoc Distribution and Enoc, will meet in the last week of every month, and announce the next month’s price on the 28th of the previous month.

In a detailed FAQ section on the Ministry of Energy’s website, the ministry explains why the decision cannot be implemented in phases.

“It is important to note that this is not a price increase, but a change in pricing schemes to correspond to international market prices. Therefore, it’s not possible to implement it in phases as deregulation means linking local and global prices,” the ministry has said.

In addition, the ministry also quashed rumours that UAE citizens will be given special fuel discount cards to avail a rebate in petrol prices.

A question in the section reads: “Will Emiratis be given financial assistance to offset the increase in their cost of living?” And the answer reads: “The decision does not include such a thing.”

The ministry has also clarified that the deregulation decision does not include any provision of fuel cards that offer special discounts to Emirati citizens.

The FAQs suggest that the petrol price at the pump may witness “a slight” increase even as diesel is set to become more affordable, thus boosting business activity in the country.

“The decision has been studied thoroughly and there will be a slight price increase based on the global prices. Businesses will not be impacted since the price of diesel, which is often used for transportation, freight and import and export operations, will decrease,” it noted.

“The decision will be applied across all the emirates, without exception,” it added. In addition, the ministry also clarified that the “price of LPG will not be affected as LPG is not included in the deregulation decision.”

Global ratings agency Fitch maintains that the UAE’s fuel subsidy move may indeed set a positive regional precedent, and other oil exporters in the region may emulate the move.

Several international agencies including the International Monetary Fund (IMF), the World Bank and think tanks such as the Economist Intelligence Unit (EIU) have, for some time, been advising the UAE and other Gulf countries to do away or at least reduce energy subsidies in order to support their respective budgets as well as increase fuel efficiency.

Even as the UAE’s economy remains strong and resilient, fuel subsidies put enormous strain on public resources.

According to IMF’s calculations, the UAE’s pre-tax energy subsidies in 2015 will amount to Dh46.42 billion ($12.64bn), or 2.87 per cent of GDP.

Lower global oil prices since 2014 have cut fuel subsidy costs, but have also reduced government revenues among Gulf oil exporters, Fitch said in a statement.

This, it noted, is evident in the agency’s near-term fiscal projections for Saudi Arabia and Bahrain, where it forecast budget deficits of 13 and 10.9 per cent of GDP, respectively, in 2015.

A newswire report in early July said that fuel and electricity subsidies in Bahrain would be gradually reduced from August, citing an unnamed government official, but no details were given.

In the UAE, the oil distribution firms had first announced their intention of raising domestic prices in 2010 when they had formed a committee to monitor and discuss petrol prices and the losses that the retailers were incurring owing to the subsidised prices.

Local distribution companies including Abu Dhabi National Oil Company (Adnoc), Emarat, and Emirates National Oil Company (Enoc) – which also operates through its affiliate the Emirates Petroleum Products Company (Eppco) – had in 2010 announced their plans about increasing prices gradually to get them on a par with international prices, but the move wasn’t ratified by the government at that time.

Now, the move comes at a time when global oil prices are at multi-year lows, around the $50/b mark, which will help minimise the financial burden of any price hike on the residents, according to the Ministry.

Suhail bin Mohammed Faraj Faris Al Mazrouei, Minister of Energy, has noted that the cost of gasoline represents 3 to 4 per cent of an 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.

Nevertheless, the Ministry clarifies in its FAQs that “[a]ny increase or decrease in oil prices globally will cause an increase or decrease in local petrol prices.”

However, the chances of any major fluctuations in the forthcoming years remains slim, with Morgan Stanley forecasting that global oil prices will remain under $70/b until 2017.

In fact, US crude for September delivery was down 1.1 per cent at $47.59 intra-day yesterday (July 27), the lowest intraday price since April 1. Brent crude for September delivery, on the other hand, was down 1.72 per cent at $53.68/b, its lowest intra-day in months.


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