UAE fuel price change would cost about $387 per head this year

The UAE was widely lauded for its move to cut fuel subsidies to promote efficiency, reduce environmental damage and encourage public transportation usage.

The government’s move to cut transport fuel subsidies would cost UAE residents an average of US$387 per head this year, although some households would be hit harder than others, according to the debt rating agency Moody’s Investors Service.

The UAE was widely lauded for its move last week to cut fuel subsidies to promote efficiency, reduce environmental damage and encourage public transportation usage.

Moody’s yesterday echoed others in saying that the move would have a positive impact on the public finances of the UAE and Abu Dhabi, as well as their credit ratings.

Among the unanswered questions, however, is how quickly the government will move transport fuel prices towards market prices, how exactly it will define market prices and how much that will add to the average Emirates resident’s fuel budget every year.

In Moody's analysis – which relies on IMF data – the annual subsidy rate for transport fuels in the UAE is $730 for each of its 9.6 million residents, based on an estimated average oil price of $58 per barrel this year.

But nearly half of that (47 per cent) is “external” costs, such as the environmental damage, traffic congestion, road wear and tear and forgone taxes which would not be transferred to drivers.

The direct subsidy this year would total about $387 per head, according to Moody’s. That compares to a direct subsidy of about $583 per head in 2013, when oil prices averaged more than $90 per barrel.

The actual cost increase that drivers will have to bear will be determined by the new fuel price-setting committee, which today will announce its first monthly petrol and diesel prices for August.

“Looking at the August prices, we’ll get an idea how rapidly they’ll want to phase in market prices,” said Mathias Angonin, Moody’s UAE analyst.

The burden of higher prices will not be borne equally, Mr Mathias notes, with multi-car households and fuel-guzzling vehicles paying disproportionately more, and that would increase as oil prices rise.

The benefit to public finances will also increase if oil prices rise.

Moody’s estimates that the price of oil will rebound to $75 per barrel by 2017.

But with prices currently low, the subsidy saving this year is estimated at $7 billion (annualised), versus $10bn in 2013.

The government’s finances will also be helped by curbing fuel consumption, Moody’s reckons.

“Rising fuel consumption [at an annual rate of more than 8 per cent] has been eating into oil exports and the share of oil consumed domestically has increased to 23.5 per cent in 2014 from less than 20 per cent before 2009,” Moody’s noted.

Another question is how committed the government will be to unsubsidised fuel prices if oil prices rise significantly, Mr Mathias said.

In a report that also praised the UAE’s move, Bank of America Merill Lynch noted yesterday how difficult Saudi Arabia had found it to make subsidy cuts stick.

“It took nearly 15 years after the 1980s oil price crash for administered energy price changes to take place,” the report noted. “Energy subsidies were in effect cut in 1995 … while electricity tariffs were raised in April 2000 but reversed six months later then modestly raised in 2010 again for industrial users.”

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