The Impact of Subsidy Removal on Gasoline Products in the United Arab Emirates

2 Research Background and Trends in Gasoline Prices in UAE since August 2015 The regulation of energy prices serves various aims in an economy. Basically, the laws are formulated to shield consumers from the volatility of the international fuel prices and to ensure that they get affordable energy by redistributing the gasoline earnings fairly. Nonetheless, the regulation of oil prices has been found to have far-reaching environmental effects due to the increased gas emission as a result high consumption of petroleum products1. The global decline in the prices of fuel between 2014 and 2016 made the major oil producing countries in the Middle East such as United Arab Emirates, Saudi Arabia and Kuwait to adopt reforms in the oil production and consumption sector through subsidies.

The increasing number of studies point out that both explicit and implicit subsidies were passed to check the producer and consumer costs respectively2. 1% of residual differences attributable to fuel changes, for the period ending 2016. However, during the period, UAE had strong sovereign financial buffers that would shield the economy from the implications of rising fuel prices. Moreover, the rising fuel prices in the period towards 2018 is an indication of inevitable economic activity in the country3. 3 Problem Statement and Significance of the Research The quantity supply of a commodity, economic conditions, and the prevailing market prices are critical factors that determine the behavior of consumers. Gasoline is an essential commodity in the United Arab Emirates (UAE). Research Objectives The specific objectives of the research are as follows- 1) To identify the factors affecting consumer behaviors, namely lifestyle change, motor technology, transportation mode change and gasoline type change.

2) To study the impact of gasoline price increase concerns on each of these factors. Research Questions To achieve the research objectives the study intend to answer the following research questions: RQ1: To what extent gasoline price increase concerns will affect lifestyle change? RQ2: To what extent gasoline price increase concerns will affect motor vehicle technology usage? RQ3: How gasoline price increase concerns will impact on transportation mode change? RQ4: How gasoline price increase concerns will be related to gasoline type change? Research Hypothesis This study will focus on testing the following hypotheses: H1: Gasoline price increase concerns have positive impact on lifestyle change. H2: Gasoline price increase concerns have positive impact on car’s technology change. H3: Gasoline price increase concerns have positive impact on transportation mode change.

1 CHAPTER 2 LITERATURE REVIEW 2. 1 Introduction This chapter will examine and analyze the various academic literatures that are relevant to the research topic. The analysis of the literature will play a critical role in providing the latest thinking and trends regarding the impact of the removal of subsidies of gasoline on consumer behavior. 2 Economic perspectives of gasoline subsidies Subsidization is one of the significant ways in which a government can promote its economic policy or social good. The policy is usually implemented for the best interest of the overall public to remove some form burden by either tax reduction or in the form of cash payment6. Arguably, subsidy removal has a profound impact on the energy production, consumption and trade as well as on the levels of greenhouse gas emmissions.

The growing number of studies have investigatd the impact of subsidy removal on these four key areas. One study investigated the effects of subsidy removal revealed that suppliers and consumers were profoundly affected following a rise in prices of goods and services in the economy10. The study also revisited subsidy reforms and found that it affected three major sectors of the economy: government and its policymakers, fuel marketing and retail companies, and oil refiners. The subsidy reforms enabled reallocation of development resources to more vital sectors of the economy by the government. 3 The deadweight loss paradigm The consumption of gasoline has been found to be high especially in countries where the government has subsidized the petroleum products at the production level.

For instance, Saudi Arabia has witnessed a rise in consumption of gasoline since the introduction of subsidies in the petroleum sector. One fault associated with subsidies is the deadweight loss. The deadweight loss paradigm arises as a result of market distortions resulting from economic inefficiency14. The deadweight loss is determined by the elasticity of demand while supply is assumed to be perfectly elastic. 4 Gasoline price increase and its impact on the lifestyle The introduction of deregulation of fuel prices in UAE has received mixed reactions from households and businesses owners. Orchestrated by the firm belief that withdrawal of subsidies would improve economic performance and relieve the country’s budget of over $10 Billion deficits, UAE has adopted the policy amidst cries and hoes of the natives.

Experts and analysts argue that the move to lift the subsidy policy is intended to create a free market. The reduction in consumption of gasoline can spur up the economy by making the market more efficient where market forces influence the price of the petroleum, products. However, the significant aspect of the subsidy removal policy is its impact on the life style of the citizens. The essence of these studies is to demonstrate the negative impact of removing a subsidy on the citizens’ living standards and the overall behavior of the economy. Cases of poor households lamenting about the skyrocketing process of basic commodities have been reported as a result of implementing the new policy. It was anticipated that the costs of gasoline would shoot up from 0.

47 cents per liter to a level as low as 80 cents18. It became difficult for the consumers to adjust to the prevailing economic conditions occasioned by the skyrocketing gasoline prices. 5% in 2019. Consumer spending is equally expected to grow by 2. 5% the year 2019. These statistics sheds light on how the UAE economy can expand by boosting investor confidence that can attract foreign direct investment and output expansion. In essence, such policies will revitalize the declining living standards due to rising costs of commodities. The policy may look cruel to the general public in the short term but in the long run, it will be useful to the country’s economic growth. 5 Gasoline price increase and its impact on the transportation mode Amid the cuts in subsidies on fuel in the United Arab Emirates, the transport sector is the most hit by the reform and was almost thrown into a state of malfunctioning.

The petrol prices affect the operations of both the private household cars and public service vehicles. Transport mode is slowly getting a switch from the conventional car transport to other modes of transportation that do not entirely depend on fuel energy. Studies have shown that the rise in petroleum prices leads to a metric increase in infrastructure investment which makes transport operators the biggest casualties24. One of the key considerations driving the government’s move to withdraw the subsidy is to maintain a clean environment. While the move has been hurting down to the household level, it is projected that it will eliminate up to 22% of the total greenhouse emissions in the UAE27. As more automobiles withdraw from operation due to rising fuel costs, the level of environmental pollution caused by greenhouse emission is expected to go down.

Increasing number of studies focusing on the impact of the rising fuel prices on the transport sector indicates that a slight change in the petrol or diesel prices has a direct impact on the transport sector. Various studies have focused on the impact of domestic fuel increases on the price of the economic sectors in countries such as Indonesia. 91% change in road transport, 12. 50% in air transport, and 13. 33% in water transport. Therefore, any difference in the fuel price of petrol has a significant effect on the mode of transportation that households use in the economy29. The impact of the rising fuel prices tends to extend to other key sectors of the economy which the prices of other commodities to shoot. The pertinent question in such a study is how the gasoline price influences the choice of the mode of transport.

Based on his slow-transit, medium transit, and high transit, the response to of the household response to the change in gasoline prices are found to be more flexible as one move through the levels31. The higher level experiences insignificant change in price compared to the lower levels. Across all the groups, welfare is seen to decline as the effect of changes in gasoline prices gets absorbed into the market. Use of gasoline products is likely to take a different trend as the low-income earners, and high-income earners will show different reactions. The upward trajectory in the petrol price in UAE has hits high as 38fils since 2017 July. The subsidy removal has the tendency to trigger new taxation policies in the countries which remove subsidies33.

For instance, recently the Federal Tax Authority (FTA) announced the 5 % tax levy on petrol in strict compliance with the Federal Decree act of 2017. The decree defined all types of oils and gases that were supposed to be taxed higher. The Saudi Arabia, the 5% tax increase has been implemented. Like the conventional belief about price increases due to the inclusion of the VAT, the oil prices continue to threaten consumers as they have inefficient incomes to meet their several needs36. The International Monetary Fund has been advising the UAE government to levy an excise tax on public transport vehicles which if implemented may further hurt the public financially. The excise tax imposed on automobiles is seen to shift costs from household consumer to the owners of the motors.

The UAE standard returns from the value-added tax are anticipated to have the least effect on the investment and overall growth of the economy. According to the government projections, the VAT on petroleum products will yield about a 2. The increases in the petrol price are as a result of the implementation of the VAT policy starting this year. The fuel price review would then become a monthly undertaking because of the active involvement of government in the oil revenues. Critically, today fuel prices are controlled actively by the government by ensuring that the VAT is attained as anticipated while maintaining that household have an obligation of meeting the excise tax recommendation issued by the IMF. The policy reforms are intended to revitalize the economy and eliminate environmental degradation that had worsened as a result of increased gasoline consumption38.

7 Implications on technological innovations Technology plays a vital role in the mining industry. However, with the advent of high costs of gasoline, there is a perception that alternative would provide the best human satisfaction. The government support of the hybrid cars in the economy is an assurance of the readiness to adopt the new technological innovation and promote the new transport mode that is environmentally-friendly. The increasing number of studies focusing on the sustainability of costs associated with crude oil establish that as long as the oil firms continue to use heavy technologies in their exploration of crude oil, the prices will continue to remain high41. Consumers have to adjust their budget to meet the prevailing market conditions. There remains no standard upon which one resident may feel the pain as the other delights.

During these periods, it is estimated that traveling costs are low and there is the maximization of consumer benefits. In the same postulation, manufacturing firms are positively placed in the market since they can meet their needs with the available resources. Acquisition of raw materials and supply costs are maintained at the flow. While the subject of low fuel prices has been explored and its impact on the consumer and economy deliberated, the subject of the rising fuel prices remain elusive43. The unchecked subsidy reforms put an economy in a state of disarray and when the reforms changes abruptly making the fuels high, it injects serious damages to all levels of production. The low prices on fuel prices due to subsidies is viewed as a threat to the national budget.

In the same light, high fuel prices are not good to economic growth either. These policies are detrimental to the growth of the UAE economy. A focusing on environmental conservation in UAE found that high gasoline prices as a strategy to curb degradation has a negative impact on the consumer autonomy46. In most occasions, consumers are forced to put up with the turbulence in the market as well as policy initiatives meted towards environmental conservation. For instance, Russia which depends on petrol incomes for economic budgets was hit when it undertook such structural initiative. Still, the tax policy initiated by the government may have effects on the entire economy. The subsidy reforms complemented with a 5% taxation may have a negative impact on the economy.

The result may be rising prices on all the basic commodities in the economy which mostly affects the consumer. 9 The Hypothesized Research Model To achieve the main research aim, we investigated the impact of gasoline price increase concerns on lifestyle change, Motor vehicle technology change, transportation mode and gasoline type change. Arzaghi, Mohammad, and Jay Squalli. "How price inelastic is demand for gasoline in fuel-subsidizing economies?. " Energy economics 50 (2015): 117-124. Burke, Paul J. , and Shuhei Nishitateno. World Bank Publications, 2009. Clements, Benedict, David Coady, Stefania Fabrizio, Sanjeev Gupta, Trevor Alleyne, and Carlo Sdralevich. "Energy Subsidy Reform: Lessons and Implications (Washington: International Monetary Fund). Coady, David, Ian Parry, Louis Sears, and Baoping Shang. "How large are global fossil fuel subsidies?" World development 91 (2017): 11-27. "Exact consumer's surplus and deadweight loss.