Fuel prices in the UAE, which reached its peak this month since the country opted for deregulation in 2015, are still among the lowest in the world because governments in other countries - unlike in the UAE - have imposed taxes on the consumption of fuel.
Generally, retail fuel prices vary in different continents but are highest in Nordic region. Compared to the UAE, prices in the Nordic states such as Norway and Sweden are higher by nearly 250 per cent and 220 per cent, respectively. In Saudi Arabia, fuel prices are the cheapest, which are nearly less than half of UAE prices.
Vijay Valecha, chief market analyst at Century Financial Brokers, says even though fuel prices are at the highest level since August 2015, UAE residents are still better off compared to the rest of the globe. "Prices in US are about 25 per cent higher, India is more expensive by 73 per cent, Singapore by 142 per cent and the UK by 156 per cent compared to UAE gasoline prices at the pump. This is primarily due to low taxes on petrol in the UAE when compared to rest of the world and also because the UAE is one of the largest exporters of crude in the world. Nevertheless, what separates the UAE from others is the low impact on inflation as fuel price comprises only three to four per cent of the UAE consumer price index," he said.
Mustafa Ansari, senior economist at Apicorp, noted that with the recovery in oil prices in the first quarter of 2018, domestic retail prices also increased in the UAE. But this is also true for the majority of the world's economies.
The difference is, therefore, in the additional costs associated in other developed countries. For those who import crude oil or even refined products there is the associated transportation costs and perhaps import tariffs. But this is sometimes less significant than the taxes imposed by the individual governments on retail fuel prices.
Ansari pointed out that the UAE imposes five per cent value-added tax (VAT) compared to 20 per cent in the UK, while some countries also impose direct taxes on retail fuel prices.
"In the UK, for example, there is a flat fuel duty of 57.95 pence ($0.78/Dh2.87) levied on both petrol and diesel which at current oil prices accounts for more than half of the country's retail cost for both products," he noted.
M.R. Raghu, managing director of Marmore Mena Intelligence, stated that due to the presence of domestic oil supply, refining and transportation costs are significantly lesser in the UAE compared to non-producers. In addition, minimal taxation has also helped in keeping prices lower than other developed markets despite the liberalisation in prices witnessed in 2015.
"Taxation is one of the major components which drive the prices higher in other countries. In a market like India, the final retail price of petrol is about twice compared to the cost of fuel after refining. This is chiefly due to the presence of multiple taxes which include an excise duty, a pollution cess, VAT and a road cess. Tax rates are also comparatively less in the UAE, as VAT is capped at five per cent while it is roughly around 27% in case of India," he added.
Fuel consumption to rise
Positive economic conditions, according Raghu, in the UAE are expected to favour an uptrend in industrial fuel consumption moving forward. As fuel is an essential commodity whose costs makes up a considerably small part of the total monthly expenses for an average resident, retail consumption is not expected to take a hit from a marginal price increase as fuel consumption is price inelastic.
Valecha sees fuel consumption in the UAE will continue to increase as the country is one of the fastest-developing countries in the region.
Ansari pointed out that UAE GDP, which is one of the main drivers of demand for retail fuel, is expected to increase from 1.5 per cent in 2017 to 3.4 per cent by 2022, whilst GDP per capita is also expected to increase by 16 per cent in 2022 compared with 2017 levels.
"This will place upward pressure on demand for retail fuels. The population in the UAE is also expected to increase by 17 per cent, which could result in higher car vehicle purchases and therefore demand for fuel. Nevertheless, the increase in oil prices would also place downward pressure on demand, but for a bigger impact, it will require higher prices for longer periods. In general, demand is expected to increase, but will remain sensitive to changes in economic growth, oil prices, and potential of further government reforms, i.e., duties on retail fuel, or further hikes in VAT," Ansari concluded.
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