Consumer prices will immediately be affected by the petrol price rise but more gradually from diesel prices, if businesses choose to pass on the reductions.The combined fuel price changes should add about 1.3 percentage points to headline consumer price inflation, according to Monica Malik, an economist at Abu Dhabi Commercial Bank.
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But in an announcement carried by news agency WAM last week, the UAE will link its gasoline and diesel prices to global oil markets from as early as August 1.
The move is part of a wider strategy to phase out subsidies and offset the effect of a drop in revenues.
The UAE has already announced that it will cut its spending in the next budget for the first time in 13 years.
Last week, the head of the newly-formed Gasoline and Diesel Prices Committee said there might be a slight increase following deregulation while the boss of ADNOC said on Tuesday that prices remain “competitive”.
“Households will start to think about how they can reduce their reliance on fossil fuels in case of future price hikes”.
He said removing subsidies during a period of subdued global oil prices should mean the inflationary impact will be felt less sharply.
He added that it would also cut fuel consumption and encourage greater use of environmentally friendly transport alternatives such as electric cars.
The worldwide Monetary Fund projects the UAE will post its first fiscal deficit this year since 2009; it estimates the country spends $7 billion annually on petroleum subsidies.
With the government subsidising fuel for three decades, prices for petrol and diesel in the UAE – the Arab world’s second largest economy – were some of the lowest in the world.
The UAE government is likely to announce the new pricing policy for fuel in the country today (Tuesday, 28 July, 2015).
Our politicians are aware that the fuels subsidies must be reduced if not eliminated, but they dare not raise the issue on the campaign trail.
Some smaller Gulf states may be emboldened to act, however.
In January, Kuwait raised domestic diesel and kerosene prices but retracted the decision later due to criticism from the parliament members.
Super-rich gas producer Qatar does not appear to be under serious pressure to economise but in the two financially weakest states among the wealthy Gulf oil exporters, the small economies of Oman and Bahrain, reforms may be imminent.
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The moderate size of the price changes suggests there will be little immediate impact on domestic consumption.
