Dubai: The move to deregulate the prices of oil could lead to consumers spending more money not just on petrol, but on living costs. But the upside is that the economy will improve and ultimately, more jobs will be created.

Starting August 1, fuel subsidies will be removed and the prices of oil will be based on average global costs.  The decision is aimed at reducing fuel consumption and supporting the national economy.

Mandagolathur Raghu, head of research at Kuwait Financial Centre (Markaz), said that fixing the prices of oil according to market forces will make consumers vulnerable to cost fluctuations. If global prices go up, the end result will be higher fuel prices in the local market. In turn, the rise in fuel can have trickle down effects on the overall cost of living.

The price of petrol in the UAE is one of the lowest in the world, but it is the highest in the Gulf Cooperation Council (GCC) region.

The reason it is cheaper than in most corners of the globe is that petrol is being subsidized by the government. Only petrol, which consumers use to fill up their tanks, enjoys government subsidy, while diesel- which is used mainly for freight and transportation- doesn’t.

The government spends nearly $30 billion a year to absorb the cost of petrol, and the same amount will be saved – and consequently spent on economic diversification activities - if the financial aid is lifted. More government savings can result in a lot of benefits, including job creation.

More savings

“The deregulation of petrol prices will mean that the government will be able to save more money, which can be potentially diverted into economic diversification activities, leading to benefits like job creation,” Raghu told Gulf News.

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Initially, analysts predicted that with the price deregulation, the cost of diesel will drop, while petrol will increase. The impact on consumers’ pockets will be significant if the global price of oil goes back to its previous level of $100 per barrel. However, with the oil still at low levels, any immediate effect will be insignificant.

“So, when we fill our cars up, we will immediately see the increase in the cost of the fuel, whereas the diesel price will take longer to reach the consumer as it flows through the supply chain,” said James Thomas, managing partner at DeVere Acuma.

“[The oil price deregulation] may lead to an increase in the cost of living for residents, and, as such, consumers need to keep an eye on the price of petrol,” Thomas added.

Thomas noted that the price of diesel, which is not subsidized, is already showing notable  difference compared to petrol.

“If we look at the price of diesel, then you can see that there is a significant difference in the prices, and if petrol moves towards the diesel price, then consumers could see a considerable increase in the cost of a tank of petrol, which will obviously have a negative impact on residents’ cost of living, and it could lead to an increase in inflation.”

Minimal

Households in the UAE, where the average income per person is one of the highest globally at $43,048 in 2013, spend about 3 to 4 per cent of their earnings on fuel. Should petrol prices go up by 20 per cent, an average consumer could be paying 0.8 per cent more on fuel, which other analysts refer to as “minimal”.

Utility bills are also believed to be protected from any price fluctuations resulting from deregulation, considering that the plants at the Dubai Electricity and Water Authority and Abu Dhabi Water and Electricity Authority are powered by natural gas.

Preeti Bhambri, a financial expert who founded personal finance site MoneyCamel.com, predicted that there will be a gradual increase in price over the next 12 months.

“While an increase in fuel prices will drive right behaviour towards fuel consumption, it will also increase the cost of transportation significantly as public transport does not connect every part of the city yet. People could consider driving a smaller or a more fuel efficient vehicle to save on transportation cost.”

Masdar's reaction

Dr Ahmad Belhoul, CEO of Masdar, said: “We support initiatives such as this to promote energy efficiency and a more sustainable energy future for the UAE.

"By allowing fuel prices to move closer to the market reality, we can advance smart choices, such as electric vehicles and renewables, which can help meet our transportation and energy needs with fewer emissions.”