UAE to cut remaining energy subsidies, minister says

'We saw the opportunity to do the right thing and to get people to pay the right price for energy,' says Suhail Al Mazrouei, the UAE’s Energy Minister.

Energy industry estimates put the average global cost of electricity at between 12 and 15 US cents per kilowatt hour. Sammy Dallal / The National
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DAVOS // The UAE will extend its economic diversification strategy by removing further subsidies on energy, Suhail Al Mazrouei, the UAE’s Energy Minister, told the World Economic Forum in Davos.

In particular, Mr Al Mazrouei said he was planning to scrap subsidies on electricity and on gas sold to power generators.

“We need to think about major reforms to make the budget less dependent on the oil price, and to build an economy that is vibrant but also taking advantage of the lower oil prices,” he said.

“We saw the opportunity to do the right thing and to get people to pay the right price for energy. We have done it with petrol and diesel, next is electricity. We must remove remaining subsidies from electricity generation. Most of it is not subsidised, the majority of the tariff is fair. But there are old gas contracts that are not realistic and do not reflect fair pricing,” he added.

He gave no details on the timing of the subsidy removals.

His comments came in a wider debate about the pace of economic reform in Arab countries, dominated by concerns from oil-producing countries about the effect of falling oil prices on regional budgets.

Mr Al Mazrouei predicted that national populations could be “persuaded” to accept and embrace economic reform even when it might affect their standard of living by increasing consumer prices. “If you have a good story and tell it to local people they will be convinced. The majority of the population is young and they’re different from past generations.

“The economy is still growing but the challenging thing is to get more efficiency. We are redirecting the subsidy as an opportunity to invest in other parts of the economy, like building schools and hospitals. It’s a convincing story. It’s not so difficult to understand,” he said.

Mr Al Mazrouei was asked if a price range of between US$30 and $40 per barrel was “the new normal” for the oil industry and if there should be a new Opec policy on production levels.

“Cartelment is unfair and unethical and has the result of bringing more expensive production to the market. But this price is not sustainable. It is very low and will not last. You have to remember that 60 to 70 per cent of oil production comes from outside Opec, and for example North Sea oil costs $50 to $60 per barrel to produce. I think we will see sustainability of a fair price for the producers and consumers by the end of this year or early next,” he said.

Mr Al Mazrouei pointed out that the low oil price had led to the cancellation of $400 billion of energy industry investment.

“This planned investment has gone. We will have a problem in two years’ time. You cannot produce oil out of air,” he said.

The new era of energy prices was one of the major themes of the WEF’s annual meeting.

On a separate panel, Khalid Al Falih, the chairman of Saudi Aramco, the region’s biggest producer, said that his company and Saudi Arabia as a country had the capacity to withstand low oil prices “for a long time”.

“We have the most resilient capacity to take whatever the market serves. If prices stay low we will be able to withstand it for a long time. But obviously we don’t hope for it,” he said. He called the current price level “irrational”.

Mr Al Falih confirmed that Aramco was studying the possibility of selling some of its business in an initial public offering but declined to give details.

Representatives from other oil-producing countries were critical of Opec policy.

Emmanuel Kachikwu, the oil minister for Opec member Nigeria, called for an emergency meeting of Opec to discuss how to increase prices, but Ilham Aliyev, the president of Azerbaijan, which has suffered economic and financial disruption, as well as public protests because of falling oil revenue, advised against calling any more Opec meetings.

“Every time Opec meets the price of oil goes down, so it’s better not to have any more special meetings,” he said.

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