The United Arab

Emirates said it would let domestic fuel prices move more freely in a

politically sensitive reform that could save the government billions of dollars

and begin reducing the wealthy country's love of gas-guzzling cars with big

engines.

Gasoline and diesel will be deregulated

from Aug. 1 and a new pricing policy linked to global levels will be

introduced, state news agency WAM quoted the energy ministry as saying on

Wednesday.

"Deregulating fuel prices will help

decrease fuel consumption and preserve natural resources for future

generations," said energy minister Suhail bin Mohammed al-Mazroui.

"It will also encourage individuals

to adopt fuel-efficient vehicles, including the use of electric and hybrid cars."

Matar al-Nyadi, undersecretary of the

ministry and chairman of its new Gasoline and Diesel Prices Committee, told

Reuters that gasoline prices might initially rise slightly because of the

reform, while diesel would fall.

At present, state subsidies keep

gasoline and diesel in the Arab world's second biggest economy at some of the

lowest prices in the world. Motorists pay 47 U.S. cents for a litre of

gasoline, less than a third of levels in western Europe.

Cutting subsidies and letting fuel

prices rise could boost UAE state finances, which have been weakened by a

plunge of oil export revenues since 2014 due to the fall in global crude

prices.

The International Monetary Fund projects

the UAE will post its first fiscal deficit this year since 2009; it estimates

the country spends $7 billion annually on petroleum subsidies.

The ministry's statement did not give

details of the new pricing policy, beyond saying the prices committee would

announce on the 28th of each month prices for the following month, basing its

decision on "average global prices with the addition of operating

costs".

The global price of Brent oil is

currently around $56 per barrel, not far from six-year lows. But linking UAE

prices to global levels could clear the way for substantial hikes in the

future, if Brent starts to recover.

Mazroui said fuel price changes would

not raise the UAE's cost of living significantly, while diesel's expected fall

next month would help the economy.

"This will stimulate the economy as

a lower diesel price would mean lower operating costs for a wide number of

vital sectors like industry, shipping and cargo among many others."

The announcement put the UAE at the

front of economic reform among the rich Gulf oil states. Other governments are

grappling with similar financial pressures but have mostly not had the

political will to push through major change.

Kuwait raised its domestic diesel and

kerosene prices in January but partially reversed the hikes a few weeks later

after criticism by some members of parliament.

Abu Dhabi, the biggest emirate in the

UAE, hiked electricity and water tariffs in January as part of efforts to cut

subsidies.