Diversifying Income
The change is part of the government’s plan 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, according to the Minister of Energy. A committee will review fuel prices every month.
Global oil prices have dropped almost 50 percent in the past year to $56.57 a barrel today as increased production from the Middle East to the U.S. swelled supplies, leaving a global surplus. The 2015 break-even crude price for the U.A.E. is about $65.50 a barrel, according to Deutsche Bank AG estimates.
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. However, when the prices start rising, it won’t look so rational.
Budget Deficit
Energy subsidies will reach $5.3 trillion this year, with the U.A.E. at $29 billion and Saudi Arabia at $106.6 billion, according to an International Monetary Fund report in May. Qatar has the world’s biggest subsidies per capita at $5,995, compared with 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, according to the IMF. A gradual approach may be desirable, given the size of the required price increases.
The oil and gas sector in the U.A.E. contributed 34.3 percent of its gross domestic product at current prices in 2014, according to the National Bureau of Statistics. With lower oil prices, the U.A.E. will have a fiscal budget deficit for the first time since 2009, according to the IMF.
