UAE facing fuel subsidies dilemma

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The UAE government has setup a top-level body to review state fuel subsidies amid calls by national retailers not to further cut oil prices as their losses soar.

Members of the Federal National Council (FNC), a consultative body, unanimously approved plans this month to cut gasoline prices for everyone, after reports suggested fuel prices in the Emirates are third highest in the Middle East, after Syria and Tunisia.

However, the oil ministry is resisting such calls and urging the cabinet to consider the long-term implications of accepting the FNC’s recommendation.

“The oil ministry strongly opposes any increase in subsidy – we are trying to improve our economy and a subsidy increase would be a huge set back,” a source close to the ministry told Reuters.

The government is pursuing a long term strategy for a modern, diversified economy which is not shackled to oil.

Despite being one of the top five world oil exporter, domestic gasoline retailers have been facing heavy losses, partly due to subsidies and imbalances between the seven Emirates.

The combined losses of the four UAE state-owned retailers: Dubai government-owned Emirates National Oil Co (ENOC); Emirates Petroleum Products Co (EPPCO); federally owned Emarat; and Abu Dhabi’s National Oil Co. (ADNOC), are estimated at 8.5 billion dirham ($2.31 billion) in 2011. The oil ministry expects this year’s losses to hit AED12 billion ($3.27 billion).

The losses in an OPEC-member country that produces around 2.5 million barrels a day of crude is because nearly almost all of the UAE’s oil is in Abu Dhabi, forcing Dubai-based retailers to import theirs at a loss.

While Dubai residents continue to receive uninterrupted oil supplies, those of the northern emirates are increasingly reliant on Abu Dhabi-run ADNOC petrol stations because it can absorb the losses being one of the world’s largest oil producers.

Foresight

Some oil analysts believe the take over of petrol stations by ADNOC is a sign that petrol retailers can no longer sustain massive losses.

“This was a signal that Dubai’s government is no longer willing and able to independently subsidise a large portion of the UAE’s population,” said Eurasia Group’s Kamel.

To relieve pressure on petrol stations in the northern emirates, ADNOC signed an agreement with Emarat on Monday to take over the management of 74 service stations in Sharjah, Ajman, Umm Al Quwain, Ras Al Khaimah and Fujairah.

However, some people still insist they are paying more compared with their neighbours elsewhere in the Gulf.

“The Federal National Council urges the government to increase subsidies for petrol and lower fuel prices so that they match those in other Gulf countries,” the FNC said in its recommendation to the cabinet last week.

A six-member committee appointed by the FNC to find out the reasons behind high fuel prices, found the cost of petrol in the UAE was higher compared to other Gulf states.

The committee argued in its report that despite being one of the world’s largest oil producing countries, it should not have the third highest fuel prices in the Arab world, behind Syria and Tunisia.

“The push by the FNC is an effort to look proactive in domestic affairs, particularly regarding issues pertaining to the welfare of Emiratis,” said Ayham Kamel, an energy analyst at Eurasia Group.

Limitations

According to the World Bank, standard grade gasoline in the UAE is sold at AED1.72 ($0.47) per litre, less than half of the global average price of $1.21 a litre.

The government pays around AED1.20 dirham towards every litre of gasoline sold.

According to International Energy Agency (IEA) data, the UAE spent 6% of its gross domestic product on fuel subsidies in 2010, with an average subsidisation rate of 67.8%. Kuwait pays 85.5% of fuel cost and the Saudi government subsidises nearly 76%.

Analysts warn that fuel use per head in the UAE is already among the highest in the world and that making petrol even cheaper will only encourage more waste.

“Many citizens in oil and gas producing countries consider low-priced energy as a guaranteed birthright,” said a United Nations Development Programme (UNDP) report, insisting that the large subsidies prevalent across the Arab world would encourage waste and termed them an inefficient way of redistributing oil wealth.

“A high share of energy subsidies has been shown to be captured by higher income groups and industries… they must be seen as a costly and inefficient tool to protect the poor in the Arab world,” the report added.

Price Mechanism

Fuel prices in the UAE are set by the federal government. Retailers sell petrol at a fraction of what others have to pay for it on a global market where prices have risen sharply in line with a 50% increase in crude prices since May 2010.

The FNC committee report blamed limited refining capacity behind the high import needs and resulting losses of fuel retailers. Industry analysts say low fuel prices are to blame for lack of investment in refining because it is impossible to make gasoline from crude without incurring losses.

“This six-member committee that was appointed has no idea about oil markets or how an economy works,” said an official from one of the state-owned fuel retailers.

“Petrol companies are already in debt and we hope the cabinet doesn’t implement this proposal.”

The UAE government last hiked fuel prices twice in 2010, adding AED0.35 per litre in total, to reduce the burden of subsidies on public finances and try to encourage more efficiency.

Further price hikes in response to a sharp rise in crude prices over the last two years were expected but now it seems likely that the government has indefinitely deferred plans for further increases.

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