In recent days the United Arab Emirates (UAE) has announced it will be cutting fuel subsidies starting August 1. It joins a growing list of countries that are taking the opportunity from a precipitous drop in oil prices in the last year to unwind longstanding subsidies.
While advantageous for the Gulf state's finances, the brunt of the removal of the subsidies will be felt by the UAE people. Given these contrasting outcomes, here are ten tidbits outlining the situation involved:
1) Fuel subsidies in the UAE currently amount to $7 billion dollars per annum, and are part of a package of energy subsidies that total $29 billion, according to the IMF...which accounts for nearly 7% of the UAE's GDP. Despite the lifting of subsidies on fuel, heavy subsidies will likely remain in place for both electricity and water.
2) As of August 1, the UAE is removing fuel subsidies, and instead basing its gasoline and diesel prices on an average of global prices. These will be set on the 28th of each month, at a fixed price for the month following. One upside to the deregulation is that diesel prices will drop, which will lower operating costs for certain industries.
3) Not only will the removal of subsidies boost government coffers, but it will help cut emissions. The UAE is one of the world's top ten worst carbon emitters per capita, as the abundance of cheap fossil fuels encourage wasteful behavior. The removal of subsidies may also free up some product for export, spurred on by a subsequent drop in demand.
4) The decision to unwind fuel subsidies is in keeping with a number of countries such as Indonesia, Angola, and Egypt, who have realigned with market prices to help offset plummeting revenues from crude oil exports.
5) To try to compensate for the loss of oil revenues, the UAE is pumping at a record, close to 3 million barrels per day. #ClipperData show that while the UAE has exported oil to a total of 28 countries so far this year, five nations - Japan, India, Singapore, South Korea, and China - account for 75% of these exports:
6) The UAE is one of the world's top ten oil producers, and the third largest in OPEC (just edging out Iran). It holds the seventh-largest proven reserves of oil in the world at 97.8 billion barrels, with the vast majority of these (94%) located in Abu Dhabi.
7) While not the lowest in OPEC, petrol prices in the UAE rank as some of the cheapest in the world. Prices are expected to rise by 75%, according to estimates next month as deregulation kicks in. This rise is, however, from a very low base, with petrol costs accounting for only 3-4% of the average income.
8) There are three million cars on the roads of the UAE, and this number is growing at 9% per annum. Deregulation is set to put the brakes on this growth, while only the low income families from the ~9.4 million population are expected to make lifestyle adjustments to accommodate for the rising costs.
9) The UAE's Minister of Energy has defended the removal of subsidies, saying 'the increase won't be drastic but it will create a shift in the mindset that this commodity is like any other with prices that go up and down. It will lead customers to use the finite resources that we have wisely'.
10) To meet its fiscal needs, the UAE requires an oil price of ~$80. Although this is well above current market prices, UAE is one of the best positioned countries from a financial position compared to its counterparts. Other Gulf states, such as Bahrain, require a price over $100 a barrel, while fellow OPEC members such as Libya and Venezuela need an oil price more than triple of what it is now.
Although it is set to fall into a budget deficit this year due to the detrimental impact of lower oil prices, it has healthy foreign exchange reserves of $75 billion to help shore up its economy.