The right move: Fuel subsidies are not sustainable

The UAE would have been right to axe fuel subsidies regardless of the economic impact

COMMENT, Business, Construction, Construction machinery, Emirates, Fuel, Fuel price in the uae, GCC region, United Arab Emirates

On 1 August, 2015 fuel subsidies were abolished in the Emirates. From this point forward, UAE prices will be based on the average global prices of gasoline and diesel.

The news met with a mixed reception. UAE motorists were amongst the first to react through social media, many pointing out that the decision would lead to cost-of-living increases. When it comes to passenger vehicles, the Emirates’ roads are primarily populated with cars that run on gasoline, the price of which increased by 24% as a result of the decision.

However, one change that has been welcomed – and widely publicised – is the resultant 29% reduction in diesel prices. This spells good news for the country’s construction sector, and indeed, industry in general. Construction machinery and trucks, for example, tend to run on diesel.

Of course, fuel prices will not remain static. Gasoline’s 24% hike and diesel’s 29% fall will alter month on month as the UAE Fuel Price Committee adjusts prices in line with the global average. Nevertheless, it looks like business – for the foreseeable future – will receive a shot in the arm from the policy.

Dr Matar Al Nyadi, Under-Secretary for the Ministry of Energy and chair of the Fuel Price Committee, said the new model would “serve as a stimulating factor for the economy”, adding: “The ministry has coordinated with all relevant entities in the country... to monitor the movement of prices and safeguard the rights of consumers. This will ensure that people across the country benefit from lower diesel prices, which would mean lower operating costs for a wide number of vital sectors, such as industry, shipping, and cargo.”

I certainly wouldn’t argue with Dr Al Nyadi’s assessment. The short-term drop in diesel prices will lower operating costs for fleet owners. In turn, one might hope that the associated benefits – at least in part – will be passed on to consumers.

But I believe that the government’s abolition of fuel subsidies would have represented a positive move, even if diesel prices had risen as a result.

The UAE presents itself as a pioneer of sustainability within the GCC region, and justifiably so. Right across the country, authorities and corporations are working diligently to mitigate their environmental impact. Whether through green building codes, eco-friendly transport initiatives, or more effective recycling practices, policy makers are doing all that they can to bolster the Emirates’ green credentials.

Laudable though such initiatives are, they would be somewhat undermined if the country had continued to facilitate the use of fossil fuels at artificially low prices in the longer term. If fuel prices had seen universal increases as a result of the subsidy removal, it would still have been the right thing to do.

The UAE’s decision to leave motorists and industry to fend for themselves might seem harsh, but it’s fair. Subsidies simply aren’t sustainable.

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