The UAE is likely to raise gasoline prices in September, an energy official said on Monday, as it moves to phase out subsidies that have strained the budget of the world's third largest oil exporter.

The official said a price hike might also prompt the government to hold talks with Oman on imposing quotas to limit the unregulated flow of cheaper subsidised fuel from the neighbouring sultanate.

"This is the third incremental increase which is leading up to the target of reaching the international price level," said the official, from the state-run Abu Dhabi National Oil Company (Adnoc), adding there was no set date for when prices would reach international market levels.

"For sure, people will be upset when the change happens, but then they will get used to it and everything will be normal," he said.

The UAE announced plans earlier this year to gradually reduce subsidies on gasoline, which cost the government hundreds of millions of dirhams a year, until prices match international market levels.

While national subsidy figures are not made public, the wealthy oil exporting emirate of Abu Dhabi has spent an average of $6.5 billion a year for the past four years on various subsidies, from water to energy, according to official data.

So far, there have been two incremental increases in the price, and a third is expected to take place after the Muslim Eid al-Fitr holiday marking the end of the fasting month of Ramadan in the first half of September, the source said.

The increase is likely to add Dh0.20 ($0.05) to the cost of a litre of fuel, which would boost the price of 95-octane gasoline to Dh1.92 ($0.52) a litre, while the same petrol in Oman costs just $0.31 a litre.

The anticipated new price in the UAE amounts to about $1.97 per gallon, still lower than the $2.17 benchmark price for U.S. gasoline futures.

Fuel demand across the Gulf has risen rapidly as subsidised prices have encouraged consumption from a growing population enjoying petrodollar-fuelled economic expansion and gas-guzzling sport utility vehicles.

Demand for oil products in the UAE is expected to rise by 3 per cent in 2010 to 304,000 barrels per day (bpd), according to Washington-based consultancy PFC Energy.

The Adnoc official said the government may hold talks with Oman to prevent the unregulated flow of cheaper Omani petrol into the UAE.

"As the removal of subsidies goes ahead, I'm sure that at some point there will be talks with Oman to have quotas on the fuel that's sold across to UAE customers, who might be trying to get cheaper fuel," the official said.

"But I don't think this will happen that much between the UAE and Oman, because not everyone lives on the border, but if it does happen it will harm Oman and the national retailers in the UAE," he added.

In July, top oil exporter Saudi Arabia investigated the smuggling of subsidised fuel sold for domestic consumption to international markets.

Diesel in the UAE is not subsidised and costs around Dh2.60 ($0.708) a litre. – Reuters