The move by the country’s Energy Ministry was viewed as a surprise, and comes as the second-largest Arab economy continues to be affected by low oil prices.

The announcement put the UAE at the front of economic reform among the rich Gulf oil states. Speaking on the environmental benefits of the decision, Suhail Al Mazroui said that deregulating fuel prices would help decrease fuel consumption and preserve natural resources for future generations.

He also said the transport sector was responsible for 22 percent of the total greenhouse emissions in the UAE in 2013 amounting to 44.6 million tons of carbon dioxide. 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.

The Ministry expects usage of public transport and electric/hybrid cars to go up as a result, although we don’t see that happening any time soon.

Global oil prices have dropped nearly 50 per cent in the past year to US$56.57 a barrel today as increased production from the Middle East to the U.S. swelled supplies, leaving a global surplus.

Pump prices for the two fuels will now be set on the basis of world prices and adjusted each month, the ministry said in a statement carried by the official WAM news agency.

Al Mazroui elaborated that the decision will contribute positively to the UAE’s investment environment, enhance its economic competitiveness, and support the policy of a free-market economy with no direct interference from the government.

Fuel prices in the UAE are already the highest of any of the six Gulf Arab states but still among the lowest in the world because of the heavy subsidy. Prices are set to be based on an average of global prices, but the statement did not give full details of the pricing formula or say whether prices would rise all the way to global levels. He added that the pricing mechanism is structured in a way that it does not rely on just one global market and will facilitate distribution companies to make reasonable profits and to limit their losses while offering premium services.

The new prices effective on August 1 for gasoline and diesel will be announced on July 28. It will help alleviate pressure on a federal budget constrained by lower oil prices but thanks to lower costs should have only a “modest impact” for drivers for now.