Dubai to take fuel subsidy cut in stride

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On August 1, an increase in petrol charges came into force in Dubai and the rest of the UAE, following the announcement on July 22 by the Ministry of Energy (MoE) that the government is removing the fuel subsidy it has traditionally paid.

Prices at the pump for special grade fuel rose 24% to Dh2.14 ($0.58) per litre and super grade petrol increased by 22.9% to Dh2.25 ($0.61). However, prices will be reviewed on a monthly basis, taking any changes in global oil rates into consideration.

Due to fluctuations in market prices, the price of special grade fuel eased to Dh1.96 ($0.53) at the end of August, while diesel rates fell by 29% to Dh2.05 ($0.56) per litre before dropping a further 9% one month later to Dh1.86 ($0.51).

Industry windfall

Lower diesel prices are expected to boost growth in Dubai, where fuel constitutes 40% of industrial costs, as well as bring benefits to the transport sector, which the IMF expects will be a key growth driver for the emirate this year and next.

The transport, communications and storage sector accounted for 14.8% of Dubai’s GDP in 2013, valued at around Dh48.4bn ($13.2bn). The sector is growing at a robust rate of 5.6%, and its track record is largely attributable to government efforts to cement the emirate as a multi-modal transport hub. 

Although much of the commercial transport sector operates on cheaper diesel, the rise in petrol prices could have an impact on consumer choices. The new policies may also bolster Dubai’s efforts to expand infrastructure for battery-run cars and introduce new incentives to encourage drivers to switch to more environmentally friendly vehicles. 

Dubai’s thriving automotive sector is seen as a litmus test for new technology in the region, with the emirate one of the first to introduce technology such as hybrid vehicles. Until now, part of the attraction of conventional cars was low fuel costs, but that era may now be drawing to a close.

“Fuel prices are still relatively cheap, which doesn’t provide such a great incentive for hybrid or green energy at the moment, but if prices keep going up these models might become an alternative for car owners,” Karl-Johan Sandesjo, general manager of Gargash Enterprises, the authorised Mercedes-Benz distributor in Dubai, told OBG. Even if green technology remains a ways off, a drop in diesel prices could help move purchases away from conventional petrol options.

Rationalisation to spur growth

Other beneficiaries of the new fuel policy include Dubai-based Emirates National Oil Company (ENOC), which announced plans in August to expand its network of filling stations beyond its home market, offering it the opportunity to generate earnings without a state-imposed cap.

The scrapping of fuel subsidies and a move towards open-market conditions are incentives to broaden the company’s base, ENOC CEO Saif Al Falasi said on the day the new pricing policy came into force.

“With the MoE having deregulated oil prices, this decision will now enable us to move forward with our expansion plans and continue investing in technologies that enhance customer service and experience,” he said. “We will also meet the growing public demand for more service stations in line with the expected population growth in the UAE over the next five years.”

Balancing act

While the lifting of subsidies should help reduce the strain on state resources, experts have warned the rising cost of living in Dubai − which has some of the highest rental rates in the world − could make the emirate a less appealing place for foreigners to work or to start a business.

Economic forecasts suggest that the removal of the fuel subsidy will add 1-1.5% to inflation in Dubai and the rest of the UAE, as higher costs are passed down the production and distribution chain. While lower diesel prices will reduce logistics costs and potentially bolster the free zones in Dubai that rely on shipping and exports, any savings may be offset by rises in other charges, such as higher taxi fees and operating costs for personal and small commercial vehicles.

Nonetheless, the fuel subsidy reforms have been widely welcomed, with the IMF long advocating that oil-producing nations need to scale back support for energy costs. Suhail Al Mazroui, minister of energy, said the new price scheme would “improve the UAE’s competitiveness while positioning the nation on international indices”.

With approximately $7bn spent on petroleum subsidies per year in the UAE, according to the IMF, the savings will help strengthen state finances, as international oil prices continue to weigh on growth.

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