Thursday, Jul 23, 2015

Dubai: The move to deregulate the prices of oil could help the UAE government save several billions of dollars a year on fuel subsidies, an analyst told Gulf News.

Starting August 1, fuel subsidies will be removed and the prices of oil will be based on average global costs. The decision is aimed at reducing fuel consumption and supporting the national economy.

The price of petrol in the UAE, where residents have higher incomes than in many other markets, is one of the lowest globally, but it is the highest in the Gulf Cooperation Council (GCC) region. The reason it is cheaper than in most corners of the globe is that petrol is being subsidized by the government. Only petrol, which consumers use to fill their tanks, enjoys government subsidy, while diesel- which is used mainly for freight and transportation- doesn’t.

The government spends nearly $30 billion a year to absorb the cost of petrol, and the same amount will be saved - and consequently spent on economic diversification activities - if the financial aid is lifted.

According to Mandagolathur Raghu, head of research at Kuwait Financial Centre (Markaz), more government savings could result in a lot of benefits, including more employment opportunities for UAE residents.

“For the UAE, energy subsidies stand at close to $30 billion per annum. Thus, deregulation of petrol prices will mean that the government will be able to save more money, which can be potentially diverted into economic diversification activities, leading to benefits like jobs creation,” Raghu said.

Initially, analysts predicted that with the price deregulation, the cost of diesel will drop, while petrol will increase. The impact on consumers’ pockets will be significant if the global price of oil goes back to its previous level of $100 per barrel. However, with the oil still at low levels, any immediate effect will be insignificant.

“So, when we fill our cars up, we will immediately see the increase in the cost of the fuel, whereas the diesel price will take longer to reach the consumer as it flows through the supply chain,” said James Thomas, managing partner at Acuma.

“[The oil price deregulation] may lead to an increase in the cost of living for residents, and, as such, consumers need to keep an eye on the price of petrol,” Thomas added.

Thomas noted that the price of diesel, which is not subsidized, is already showing notable difference compared to petrol.

“If we look at the price of diesel, then you can see that there is a significant difference in the prices, and if petrol moves towards the diesel price, then consumers could see a considerable increase in the cost of a tank of petrol, which will obviously have a negative impact on residents’ cost of living, and it could lead to an increase in inflation.”

By Cleofe Maceda Senior Web Reporter

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