Petrol prices in UAE are due to increase 24% with effect from 1st August. This will make the cost of petrol in UAE amongst the highest in GCC. However it will still be lower than in most countries round the world. Whilst there has been plenty of comment in the local press about the increase and the impact it will have on the cost of filling up the average family saloon, there are wider considerations for the economy.
Demand for fuel is, as economists call it: ‘inelastic.’ This is because we all need it and there are few alternatives we can quickly adopt to take its place. Therefore in the short term prices could increase dramatically and we would still pay. In the longer term people change their buying patterns and seek alternatives to avoid the higher prices.
The world’s economy is based on hydro-carbon fuel. There is virtually no business or industry on earth that does not have some need for fuel. By increasing the cost of this basic commodity the cost of all goods and services will eventually be effected as businesses attempt to pass on their increased production and delivery costs to their customers. The employed customers seek higher wages and a cycle of inflation begins. The UAE economy is linked US fiscal policy as the Dirham is linked to US Dollar. Consequently, the UAE authorities lack some of the traditional financial levers governments use to combat inflation, such as control over interest rates.
The amount by which prices increase will be dependent on the amount of fuel the business and its employees use. In UAE most goods are delivered by truck. At the present time, there is no rail option but we are fortunate that most trucks run on diesel which has not been effected by any price increase.
Additionally, the amount an average expat spends on fuel as a percentage of his or her salary is quite small compared to what they would spend in other countries. Therefore even a 24% increase should not significantly impact their standard of living. But they may opt for a more fuel efficient vehicle when they next change their family car.
Therefore whilst the increase in petrol price is not welcome, I do not believe that it could be used to justify significant price increases elsewhere and should not greatly increase inflation within the economy.
As always, please let me know if you have any thoughts or questions.