A relatively easy adjustment for UAE consumers

IT is one week since the deregulation of petrol and diesel prices in the UAE and we have not seen the usual protests that often accompany such moves in other countries. This is indeed a sign of acceptance by consumers to the price changes.

The reasons for acceptance are multifold. First the timing of the deregulation is most appropriate as crude oil and product prices in the international market is almost half what they used to be in June 2014 and if the deregulation was effected at that time, the price adjustment would have almost doubled prices.

The second reason is the level of adjustment of gasoline price upwards and the more welcome diesel price adjustment downward. On a simple average for all grades of gasoline, the relative increase in prices per litre is about 25 per cent, which does seem to be high except when looking at the absolute change of the same average of about 43 fils a litre, which may translate into Dh25 per fill.

The third reason is the transparent mechanism set up for future monthly adjustments. Prices from now on will be linked to international product prices. The new Gasoline and Diesel Prices Committee headed by Dr Matar Al Nyadi, under-secretary at the Ministry of Energy, will meet on the 28th of every month to set fuel prices for the following month.

The committee is made up of representatives from the ministries of energy, economy and finance and CEOs of oil distribution and marketing companies in the country. And therefore is likely to cover in its discussions the interests of consumers, producers and dis- tributors of fuels. This is really a new experiment as in developed countries, prices are left to the companies to adjust or not and often with a time lag.

Finally the adjustment of the diesel price significantly downwards, with consumers now paying 85 fils a litre less than what they used to pay. This has given more credibility to the whole operation as it is now assumed that the government is for rationalisation of product prices rather than just enhancing its own finances. According to OAPEC Annual Statistical Report of 2014, the UAE consumption of gasoline in 2013 was 158,700 barrels a day while diesel consumption was 79,000 barrels. Of course consumption has risen by now, but let us make approximate calculations based on the above numbers. We will find that the government and its companies will make approximately Dh174,000 a day during this month as the total increase in gasoline revenue is close to the reduced revenue of diesel.

The monthly adjustment if any is likely to be small - upward or downward - compared to the initial adjustment unless crude oil prices go through the roof again. This is extremely unlikely given the surplus in supplies that is now available or expected. The adjustment and the perception that prices may rise again will promote rationalisation of drivers' behaviour in not only reducing consumption but seeking more efficient vehicles in the future. It will also encourage more people to use public transport, especially with the way these services are likely to develop in more than one emirate of the UAE. The online poll on Gulf News is very encouraging as 40 per cent of respondents said they will be driving less, 30 per cent said they will not be affected and the others will also cut their fuel consumption some how. Any reduction in consumption will undoubtedly have environmental advantages in reducing emission and avoiding congestion on roads, especially if people start sharing their cars and taxis. The reduction in diesel prices will have a measurable advantage for construction companies and may reduce the cost of long-haul transportation and major projects.

The rating agency Moody's calculation that 'scrapping fuel subsidies will cost UAE residents an average of $387 (Dh1,420) per head this year' may be too high because it is based on an IMF calculation which assumes oil prices at $58 a barrel while current prices are below $50 a barrel. At least it is too early to make such conclusions. The credit agency Fitch said that the removal of subsidies in the UAE may set a 'positive fiscal precedent' for other GCC countries. Oman is reported to be discussing cutting subsidies this year to also prevent smuggling of fuel to the UAE.