An Emarat petrol station in Dubai Image Credit: Ahmed Ramzan/Gulf News

Dubai: The decision by the government of the UAE on Wednesday to “deregulate” petrol prices will have a fractional impact on the cost of living for citizens and residents, economists say.

“What we’re talking about is a small impact on the cost of living and overall costs,” Nasser Saidi, founder and president of Nasser Saidi & Associates and former chief economist at Dubai International Financial Centre, told Gulf News by phone

Federal government subsidies on petrol prices in the UAE will be removed from August 1 with a newly established fuel price committee to set the prices each month based on the average of international prices plus operating costs.

Matar Al Neyadi, Undersecretary of Ministry of Energy and head of the new committee, told Gulf News by phone on Wednesday that petrol prices will go up but diesel prices will be cheaper under the changes.

It is unclear how much prices will change by but the impact is expected to be marginal, according to economists.

Currently, fuel prices amount to 3 per cent to 4 per cent of an average household income in the UAE, the Minister of Energy, Suhail Al Mazroui, told state news agency WAM in the report announcing the changes.

Saidi said that if petrol prices were to rise by 20 per cent then that would amount to a 0.8 per cent increase in the amount fuel prices account for in an average household income.

“It’s a fraction of a fraction … it’s a very small number and I don’t think the impact on inflation will be substantial because it is a once and for all increase in prices not an inflationary one,” he said.

Petrol prices in the UAE are currently some of the cheapest in the world at 47 US cents compared to the global average of $1.10 as of July 20, according to fuel price tracking website globalpetrolprices.com.

Once subsides are removed prices are likely to fluctuate, which means they can both increase and decrease, depending on the price on the international market. However, the government has not yet stated the exact formula on how they will index the price.

Globally, oil prices have been volatile over the past 12 months with benchmark Brent crude falling to $56.69 a barrel as of mid-afternoon local time on Wednesday from a June 2014 high of around $115 a barrel.

“It would seem to be an opportune time to reform state subsidies of fuel without causing a sharp spike in inflation or the cost of living in the near term,” Khatija Haque, Head of MENA Research, Global Markets & Treasury, Emirates NBD, told Gulf News by email.

The UAE government is hopeful that the removal of fuel prices will reduce the countries carbon footprint with consumers becoming more conscious on how they use there car once the subsidy is removed.

“It’s a very important reform measure and a necessary one. The overall costs of the subsidies is close to about $29 billion when you take into account not only the direct costs of the subsidy, which is about $12.5 billion, you need to add pollution costs, global warming costs, accident caused by people using their cars more frequently,” Saidi said.

“Removing the subsidy is obviously going to have an impact on consumption it will reduce petrol use because of higher costs and will help avoid all those other indirect costs of the subsidy,” he added.

Electricity and water bills in the country are unlikely to be affected by the changes. The Abu Dhabi Water and Electricity Authority (ADWEA) and the Dubai Electricity and Water Authority (DEWA) plants run on natural gas, Robin Mills, head of consulting at Manaar Energy in Dubai, told Gulf News by email.

Some of the plants in the country’s Northern Emirates may at times use diesel, Mills said, but that is already bought on the open market.

The property market is also unlikely to be affected by the changes. While some consumers may be concerned about the sudden higher cost of petrol equating to less money in there wallet, ultimately it “is a small impact on the cost of living and overall costs,” Saidi said.

— With inputs from Fareed Rahman, Senior Business Reporter, in Abu Dhabi,