While Nigerians are still debating as to whether fuel subsidy should be removed or not, the United Arab Emirates (UAE), the third-biggest oil producing country in the Organisation of Oil Producing Countries (OPEC), has decided to remove transport fuel subsidies from August 1, this year.
UAE’s Ministry of Energy confirmed in a statement on Wednesday that fuel subsidies will be removed from August 1. Gasoline is now subsidized in the UAE, the second-biggest Arab economy and home to about 6 percent of the world’s oil reserves. Unleaded gasoline 98 octane in the UAE sells for 1.83 dirhams (50 cents) a litre, according to prices on the ministry’s website. The US price of premium unleaded gasoline is $3.18 a gallon, or 84 cents a litre, according to AAA, the biggest US auto group. That compares with 16 cents in Saudi Arabia, the largest OPEC producer.
“There was no reason to subsidize in a country that is as rich as the UAE,” said Nasser Saidi, former chief economist at Dubai International Financial Centre and head of Nasser Saidi and Associates. “All manufacturing and industry which is highly energy intensive will need to adjust. People will now have to think twice before buying gas guzzling cars.”
The UAE, which doesn’t impose income tax or measures such as value-added taxes, comprises seven sheikhdoms including Abu Dhabi and Dubai, the Persian Gulf business hub. Expatriates comprise about 80 percent of the country’s residents.
The change is part of the government’s plan “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,” Minister of Energy Suhail Al Mazrouei said in the statement. A committee will review fuel prices every month, it said.
Global oil prices have dropped almost 50 percent in the past year to $56.57 a barrel today as increased production from the Middle East to the U.S. swelled supplies, leaving a global surplus. The 2015 break-even crude price for the UAE is about $65.50 a barrel, according to Deutsche Bank AG estimates. “Moving to international prices is a very rational and a correct policy to undertake at this moment because the international oil prices are very low,” Saidi said.
Energy subsidies will reach $5.3 trillion this year, with the UAE at $29 billion and Saudi Arabia at $106.6 billion, according to an International Monetary Fund report in May. Qatar has the world’s biggest subsidies per capita at $5,995, compared with the U.S. at $2,177 and China at $1,652.
“Low international energy prices have opened a window of opportunity for countries to move toward more efficient pricing of energy,” the IMF said. “A gradual approach may be desirable, given the size of the required price increases.”
Saudi Arabia uses fuel and power subsidies to transfer oil wealth to citizens, and the kingdom is expected to post a budget deficit equal to 20 percent of economic output this year, the IMF said last month. Cutting them is politically sensitive after domestic discontent led to the overturning of governments in Tunisia, Libya and Egypt since 2011.
The oil and gas sector in the UAE contributed 34.3 percent of its gross domestic product at current prices in 2014, according to the National Bureau of Statistics. With lower oil prices, the UAE will have a fiscal budget deficit for the first time since 2009, according to the IMF.
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