Commodities, Emerging Markets, Energy, Frontier Markets

UAE Hikes Gas Prices By 24% As It Halts Subsidies Amid Oil Bear Market

opec-oil-energy1The United Arab Emirates (UAE), the second-largest Arab economy and OPEC’s third largest oil producer, will hike unleaded gasoline prices by 24 percent in August as it becomes the first country in the oil-rich Persian Gulf to remove subsidies, the UAE’s official WAM news agency reported on Tuesday.

Drivers in the UAE will now pay 2.14 dirhams per liter (around 58 cents), up from the previous 1.72 dirhams per liter, for 95-octane unleaded gasoline starting August 1, an increase of 24 percent.

The UAE’s Ministry of Energy announced last week in a statement that fuel prices would be deregulated starting on August 1 in an effort to support the national economy, lowering fuel consumption, protecting the environment, and preserving national resources.

Suhail Al Mazroui, the UAE’s Minister of Energy said last week: “The decision to deregulate fuel prices has been taken based on in-depth studies that fully demonstrate its long term economic, social and environmental impact. The resolution is in line with the strategic vision of the UAE government in diversifying sources of income, strengthening the economy and increasing its competitiveness in addition to building a strong economy that is not dependent on government subsidies. This step will put the UAE on par with countries that follow sound economic methodologies. It is also anticipated to improve the UAE’s competitiveness while positioning the nation on international indices.”

Persian Gulf members of OPEC provide some the largest per capita energy subsidies in the world, according to the International Monetary Fund (IMF). Subsidies have cost UAE state-owned energy companies about $1 billion a year over the last decade, the UAE’s Minister of Energy said in February.

Global oil prices have plunged over 50 percent in the past year as increased production from the Middle East and the U.S. has swelled supplies and left a global surplus.

On Monday Brent oil closed in London 20 percent below the peak it reached in May as it re-enters a bear market.

Large oil companies are feeling the sting from the fall in prices, such as BP whom reported a 64 percent decline in second quarter profit to $1.3 billion, which was well below the average $1.7 billion estimate of 17 analysts surveyed by Bloomberg.

Deutsche Bank estimates that the UAE’s break-even crude price in 2015 is around $65.50 a barrel.

“Moving to international prices is a very rational and a correct policy to undertake at this moment because the international oil prices are very low,” the UAE’s Minister of Energy said.

Global energy subsidies will reach $5.3 trillion this year, with the UAE at $29 billion and Saudi Arabia at $106.6 billion, according to an IMF report in May. Qatar has the world’s largest subsidies per capita at $5,995, compared to the U.S. at $2,177 and China at $1,652.

“Low international energy prices have opened a window of opportunity for countries to move toward more efficient pricing of energy,” the IMF said. “A gradual approach may be desirable, given the size of the required price increases.”

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