Business reaction to UAE fuel price changes
Fuel prices will be deregulated from next month and a new pricing policy linked to global prices will be adopted, the Ministry of Energy has announced. Here’s the reaction from companies around the country:
Elias Monem, CEO Agility Middle East and Africa
The removal of transport fuel subsidies in the UAE is in line with the government’s plans to build a strong economy that is no longer reliant on subsidies.
As the UAE has continuously and successfully pursued a wider policy of diversification, Agility believes the UAE, a key hub for our organisation in the region, is in a good position to weather the increase.
Ongoing investments in the region’s logistics infrastructure, combined with its location, give it a clear edge over other markets. Modern warehouses, strong transportation infrastructure and the streamlining of customs procedures have made it an increasingly attractive hub.
In terms of the effect the de-subsidisation of oil prices will have on Agility, we don’t see lower oil prices as having a negative effect on our operations.
We in fact expect to see more and more opportunities for us as a result of the lower oil prices, and we will adjust to the change just like all businesses that are competitive and agile at heart. As oil prices go down, you can refuel your trucks and run your assets in a less expensive way.
HE Matar Al Nyadi, Undersecretary of the Ministry of Energy and Chairman of the Gasoline and Diesel Prices Committee
The undersecretary said that the new committee would determine on a monthly basis, starting on July 28th, the prices for retail gasoline and diesel for the following month.
The prices will be based on the average price of one of the various international fuel price trackers - such as OPIS - plus a margin for the distribution companies, Adnoc and Enoc.
He didn’t want to disclose which benchmark was being used or the margin level, but said it would become apparent over the next few months.
“We think the price of diesel initially will go down a little and gasoline might go slightly up,” he said.
“The idea of liberating the market, we believe, is that it is healthy to have an open market. It will help reduce consumption and bring more efficient use and encourage a more efficient type of car that will be introduced.”
The fuel price liberalisation is part of three-pronged policy initiative that includes the introduction of more fuel efficient specifications for automobiles in coordination with other GCC member countries, as well as new plans for public transport.
“We are already designating new lines for buses and looking at incentives to encourage use of public transportation.”
While the price increases in gasoline should not be enough to be felt by average Emiratis because of the relatively high level of incomes in the country, the undersecretary said that it should be enough to make people think about being more efficient.
“It should help change behaviour and encourage more use of public transport.”
He said it might also free up some additional refined products for export from the newly expanded refining facility at Fujairah.
John Lodewijks, professor of economics, SP Jain, business school
The decision to remove subsidies and restore gasoline prices to some sort of market value is a good move. It encourages people to conserve the use of gasoline, to reduce unnecessary driving, and it protects the environment and encourages people to look to new forms of transport. Petrol prices, and the cost of upkeep on a fuel-inefficient vehicle, are amazingly low – you can see that from all the luxury cars and SUVs on the roads. There’s nothing to discourage people to buying this kind of car. So a change in subsidies may affect people’s purchasing decisions
How quickly will they let these prices go up? A lot of people would say that it should be a gradual process – you have to give firms time to adjust. A gradual transition process should the be order of the day – people have to get to work some distance from where they live, so they may have to lump a cost increase. Firms need times to adjust to take higher prices in – people will need time to adjust, and presumably that’s what the government is going to do.
Petrol prices feed into the cost of living, inflation rates, and the real standard of living. By all means increase the prices to boost fuel efficiency, alternative sources of energy, and to boost public transport.
We have some awfully affluent people around here, and the subsidies won’t make a difference to them. People on low incomes might feel this pretty hard on their bottom line – so there’s an equity effect.
Reducing subsidies is a positive hit for the budget – you can use that in other ways. The government has heaps of good projects in mind.
John Podaras, a partner at Hotel Development Resources, a consultancy in Dubai
It is feared that fuel prices will rise and that would have a direct impact on the hotels. In Dubai, the energy costs of a hotel comes to about 5 per cent of its total revenues, and that includes oil and electricity prices. They won’t be affected by a big number but a possible rise in petrol and diesel prices would directly impact their bottom line. Most likely they are going to absorb it.
Matthew Green, the head of research and consultancy at CBRE in Dubai
Everything would be more expensive from goods to services. But the wider industry fundamentals are strong. This year was going to be challenging compared to 2014 or 2013 in terms of average daily rates and occupancy rates. But that’s something the hoteliers have already factored in. Both Dubai and Abu Dhabi markets are proving to be resilient.
Jason Tuvey, emerging markets economist Capital Economics
It’s a big move for a Gulf country to deregulate petrol prices. It’s an encouraging step as the government tries to place the public finances on a sounder footing.
This is part of the social contract between rulers and citizens. We think that even if oil prices were to go back to $100 per barrel, they’ll still end up being heavily subsidised to some extent - they will be capped in order not to hit households too hard.
It’s better to [cut subsidies] when oil prices are low, rather than when oil was at $100 per barrel. It’s a way of implementing reform without too much pain.
Diesel and gasoline, deregulated how? The statement said that the price of diesel will fall – so I expect that there is some kind of ‘funky formula’.
This will be based on average price for certain period of oil prices or gas prices. Not just going to rely on one benchmark as part of this pricing formula, and then rebase over a period of time. It’s not clear how this will lead to a fall in the diesel price.
If oil prices were to edge higher, this would increase inflation. But with oil prices set to remain low it probably won’t have much effect at present.
In essence, Dubai still seems like a hub for finance in the region – so a higher cost of living won’t harm its position as a hub for expats. If you’re a European expat looking at moving somewhere in the Middle East, Dubai would still be the most attractive destination. A lot of people from the rest of the GCC will still come to Dubai – ending petrol subsidies won’t have a material impact.
The government said the strategy was aimed at pushing people towards hybrid and fuel efficient cars. With low energy prices energy consumption in the Gulf as a whole is very high on a per capita basis. It’s very difficult to tell what the impact on consumer behaviour will be – if the prices for gasoline go much higher. But the effect will probably be marginal. Most Emiratis will continue to drive around in their SUVs or Maseratis.
Monica Malik, chief economist ADCB
It’s hard to gauge the impact on inflation at this point as details of the reform mechanism has yet to be announced.
The UAE has been the most proactive since the fall of oil prices, especially with subsidy reform. That is promising for fiscal sustainability. We’re seeing signs of strong commitment to fiscal reform.
The government will try to balance it with the impact on the economy, the competitiveness of the economy. Fiscal reform is on the agenda.”
[The move is] in line with utility reforms – strong economic growth, domestic consumption have increased markedly – and so has water consumption that means expensive desalinisation, Gulf countries have been growing domestic demand which is eating into export potential. So the government is taking measures to improve fiscal sustainability, but also management of resources.
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Updated: July 22, 2015 04:00 AM