In January 2015, Suhail Al Mazroui, the Minister of Energy in the United Arab Emirates (UAE), announced that lifting energy subsidies was 'just a matter of time'. Six months on, that time appears to have come. On 22 July, the United Arab Emirates (UAE) government announced that the prices of gasoline and diesel will be deregulated from 1 August. Mr. Al Mazroui said that the decision had been taken 'based on in-depth studies that fully demonstrate its long term economic, social and environmental impact'.

The details of the new pricing policy remain unclear. As part of the reform, the government has established a committee (the Gasoline and Diesel Prices Committee) which will be responsible for setting domestic fuel price levels on a monthly basis. Gasoline and diesel prices will be linked to global prices, but details on the exact pricing formula are yet to be provided. Matar Al Nyadi, Undersecretary of the Ministry of Energy and Chairman of the new pricing committee, was quoted as saying that 'prices will be based on the average price of an international fuel price tracker, plus a margin for the distribution companies'. Full details of fuel price changes beginning 1 August are expected to be released on 28 July.

Currently in the UAE, gasoline costs US$ 0.47 per liter while diesel costs US$ 0.79 per liter. These prices are high by regional standards, representing two times the GCC average for petrol and three times the regional average for diesel. The National newspaper quoted Mr Al Nyadi as saying that ‘we think the price of diesel initially will go down a little and gasoline might go slightly up’.  He went on to say that fuel price liberalization will ‘help reduce consumption and bring more efficient use and encourage more efficient types of car to be introduced.’

Background: GCC fossil fuel energy subsidies

The UAE and wider Gulf Cooperative Council region have some of the highest rates of fossil fuel energy subsidization in the world. Consumer subsidies on oil, gas, and electricity accounted for between 65 to 80% of the full cost of supply in the GCC in 2013.

A recent Global Subsidies Initiative report, The Context of Fossil-Fuel Subsidies in the GCC Region and Their Impact on Renewable Energy, estimates that GCC governments spent US$ 51 billion on petrol and diesel subsidies in 2011. The UAE was estimated to account for about US$ 2.4 billion of this amount, which represents approximately 0.7% of GDP. The report then outlines the adverse effects of fossil fuel subsidies in the GCC context. Low fuel pricing has led to over-consumption of hydrocarbons, with the GCC countries typically consuming twice as much energy per capita as countries with a similar level of per capita GDP. Mr. Al Nyadi alludes to one benefit of reduced consumption associated with the proposed reform, stating that it may ‘free up some additional refined products for export’. In addition to over-consumption, fuel subsidies crowd out renewable energy investment and disincentivize the pursuit of energy efficiency. Indeed, the GSI has estimated that the annual cost of energy subsidies in the Middle East and North Africa is greater than the total cost of meeting regional 2020 renewable energy targets. Finally, the opportunity cost of selling fuels domestically at prices below international market rates is a fiscal pressure on GCC governments. For example, the IMF expects the UAE to run a deficit of 2.3% of GDP in 2015.

Given these adverse effects, energy subsidy reform in the UAE is perhaps not surprising. The rapid fall in world oil prices has created a window of opportunity for governments to phase out and remove such subsidies. The UAE announcement represents the latest in a series of reforms in the GCC. Qatar increased diesel prices by 50% in May 2014, while Kuwait doubled diesel prices six months later. Both Oman and Bahrain announced large reductions to natural gas subsidies for industrial users in the first half of 2015.

Further Reading

The Context of Fossil-Fuel Subsidies in the GCC Region and Their Impact on Renewable Energy, IISD GSI, 2014