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Silver lining to UAE's fuel price increases

Reduced subsidies will discourage profligacy and encourage competition

Image Credit: Gulf News Archive
The best way for countries to secure a reliable and cost-effective supply of fuel is to liberalise their markets and to let the forces of supply and demand determine the price.
Gulf News

From April 21, the price of fuel in the UAE will increase by Dh0.15 a litre. This will be felt in the pockets of families and companies as the increased cost gradually makes itself felt throughout the business supply chain. However, the price of fuel in the UAE remains relatively cheap.

Fuel is a commodity that every modern economy needs to function. Because of its strategic importance, most governments try to control the fuel industry — and the price of the commodity to ensure a secure and cheap supply for their companies and citizens.

But cheap fuel is not a right for consumers. In fact, a higher fuel price has the added benefit of reducing demand and the less polluting fossil fuels that are used, the better for the environment. One of the most effective ways to encourage the efficient use of fuel and the development of cheaper alternatives is to let its cost increase to its market price. Government subsidies, used to keep the price of fuel artificially low, encourage the inefficient and wasteful use of the resource. And consumers often still end up carrying the hidden cost through other expensive price distortions in the economy and government mechanisms used to raise revenue to pay for the subsidies.

The best way for countries to secure a reliable and cost-effective supply of fuel is to liberalise their markets and to let the forces of supply and demand determine the price. If the price is high enough to make it worth their while, suppliers will make their way into the market. As more supplies reach the market, the price will drop.

The fuel price is determined by a complex equation which takes into consideration refining and transport costs, but should be set by a free market. When the price of crude oil or refining costs increase, consumers must bear the cost; when prices drop, consumers should reap the benefit of the lower costs.

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