The Fuse

UAE Makes Bold Move to Sharply Improve Fuel Economy

by Matt Piotrowski | October 05, 2016

The persistently low oil price, along with global environmental goals, has motivated Middle East energy producers to substantially rethink how they consume petroleum. Many governments there have reformed fuel subsidies in order to rein in wasteful consumption and, just as important for them, improve their dire fiscal situations. Although retail fuel prices in many countries in the region remain far below global averages, governments are finally beginning to move towards more free-market systems. Middle East countries such as Iran, Saudi Arabia, the UAE, and Qatar have relied on subsidies to help placate their populations with generous social programs, and the pain they have experienced during the current oil market downturn has exposed the dangers of continuing the policies that have blown holes in their budgets. Besides price reforms, improving fuel economy is another piece of low-hanging fruit that Middle East oil producers can use to curb consumption, or at least keep growth in check. There’s been movement in this area—the United Arab Emirates (UAE) recently announced that it rolled out draft standards for fuel economy in order to reduce emissions. This action follows the emirate’s Gulf neighbor Saudi Arabia, which implemented similar measures earlier this year.

UAE government officials tout that the new standards “will play a key role in helping the UAE achieve its emission reduction targets and support the country’s sustainability agenda in line with UAE Vision 2021.”

UAE government officials tout that the new standards “will play a key role in helping the UAE achieve its emission reduction targets and support the country’s sustainability agenda in line with UAE Vision 2021.” Although the UAE says the new regulations are to achieve environmental goals, greater fuel efficiency provides an economic boon to consumers, even if they may end up expressing disdain about the higher up-front costs. The new standards are expected to provide consumers savings of $2,400-$3,500 over the lifetime of a vehicle. Regulators are still discussing details, but the standards should achieve a more than 70 percent increase in fuel economy from 2013 through 2028, along with efforts to bolster hybrids and fully electric vehicles. So far, there has not been a major public reaction to the draft standards, but that may change when they become closer to implementation. One potential danger is that high costs of newer vehicles could deter consumers from replacing their older, less efficient vehicles with more expensive ones with better fuel economy.

For the next decade, the Kingdom, which consumes some 3.3 million barrels per day, will increase fuel economy by 4 percent per year with the goal of slicing gasoline and diesel consumption some 300,000 b/d by 2030.

The UAE joins a global push to improve fuel economy, which are significant in reducing dependence on oil and meeting environmental goals. Saudi Arabia implemented CAFE standards at the beginning of this year, the first of their kind in the Middle East. For the next decade, the Kingdom, which consumes some 3.3 million barrels per day, will increase fuel economy by 4 percent per year with the goal of slicing gasoline and diesel consumption some 300,000 b/d by 2030. The UAE and Saudi Arabia have joined Japan, the EU, United States, Canada, China, South Korea, Mexico, Brazil, and India in establishing fuel efficiency standards. Current CAFE standards have made a large impression: According to the International Council on Clean Transportation (ICCT), in 2013, the markets with fuel economy measures at that time accounted for some 80 percent of global passenger vehicle sales. Government leadership has been more vital in improving efficiency than relying on solely market forces. The International Energy Agency said earlier this year: “In countries lacking polices such as fuel taxes or efficiency regulations, technology developments tended to go to weight and size rather than fuel economy, resulting in only moderate gains in fuel economy for new vehicles.”

Needed reforms

The new standards in the UAE come on the heels of subsidy reforms last year, measures that should also help reduce oil demand in the emirate.

The new standards in the UAE come on the heels of subsidy reforms last year, measures that should also help reduce oil demand in the emirate. In August 2015, the government deregulated fuel prices, allowing them to track international benchmarks. According to the International Monetary Fund (IMF), the UAE spent about $7 billion on petroleum subsidies annually before 2015, which accounted for roughly 6.6 percent of GDP. When oil prices crashed in 2014-2015, the government had to tackle the financial burden caused by the subsidies. The UAE, which produces roughly 3 mbd, or about 9 percent of OPEC’s total, needs $75 per barrel to break even. As a result, the emirate had to slash public spending by about 20 percent last year as a result of lower oil prices causing the deficit to balloon to 13 percent of GDP, according to Fitch.

While the fuel economy action taken in the UAE is a positive development, it will hardly move the needle for global oil demand on its own. The emirate, which has a population of 9.5 million, consumed 778,000 b/d last year, roughly eight-tenth of one percent of the world’s total. By contrast, Saudi Arabia, home to 31 million, uses some 3.3 mbd of petroleum. And it will continue to rise amid the Kingdom’s growing economy and cheap fuel prices—which have also been reformed but are still close to the lowest in the world. Given that domestic consumption is running away in Saudi Arabia and eating into the amount of crude that can be exported, it was imperative that the main OPEC producer take measures to slow demand growth.

Middle East to be a main center of demand growth

The Middle East as one of the main engines for demand growth from now until 2040.

In its reference case for its long-term outlook, the U.S. Energy Information Administration (EIA) sees the Middle East as one of the main engines for demand growth from now until 2040. The government agency projects that the region will add roughly 5 mbd over that time period, or about two percent per year, to 13.2 mbd. Only non-OECD Asia will add more to overall global growth. The outlook is based upon a business-as-usual conditions, meaning governments will have to take more bold measures to moderate consumption.

One big question is whether other major oil producers in the Middle East—many of whom are increasing their demand for petroleum products as their economies grow—follow the UAE and Saudi Arabia and take action with more stringent fuel economy standards. Will countries also continue to move forward with more tougher subsidy reforms, similar to that of the UAE, despite their unpopularity with citizens? The IMF concluded in a 2015 study that the world subsidized fossil fuels somewhere on the order of $5.3 trillion that year, or 6.5 percent of global GDP. Continued reforms on that front will certainly help weaken demand, as will an overhaul of fuel economy standards.

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