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UAE faces gasoline susbsidy dilemma

Dubai, May 31, 2012

Emiratis' love of cheap gasoline has caused a fissure in the UAE establishment, setting a top government body against national oil companies fighting to stem losses from selling underpriced fuel.

Two years ago the UAE considered phasing out generous subsidies that mean both citizens and the larger immigrant population only pay $0.47 for a liter of gasoline.

But thoughts of raising fuel prices have been swept away by the Arab Spring that has put pressure on regimes to maintain social benefits, despite foreigners, who make up 89 percent of the population, being the biggest beneficiaries of subsidies that squeeze state coffers and fuel retailers.

This month members of the Federal National Council (FNC), which has no legislative powers, unanimously approved plans to cut gasoline prices for everyone, after complaints that citizens pay too much to fill up.

The oil ministry is opposed to any reduction in price but it will be up to the cabinet whether to accept 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 said.

Behind the government and its long term strategy for a modern, diversified economy less shackled to oil and without the feather bedding of state energy subsidies, lies a formidable industrial lobby.

In an irony for a Gulf oil economy, domestic gasoline retailers have been hit with numbing losses, partly thanks to subsidies but also due to imbalances between the 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 losses this year to reach 12 billion dirham ($3.27 billion).

The shutdown of Enoc and subsidiary Eppco forecourts in Sharjah and Ras Al-Khaimah forced citizens in these poorer northern emirates to drive long distances and queue for hours to fill up.

The closures, in a Gulf Opec country that produces around 2.5 million barrels a day of crude, was because nearly all the UAE's oil is in Abu Dhabi, forcing Dubai-based retailers to import theirs at a loss.

While they continue to do that for Dubai residents, those of northern emirates are increasingly reliant on Adnoc pump stations because as one of the world's largest oil producers it can absorb the 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 and Ras Al Khaimah, Ajman, Umm Al Quwain and Fujairah.

Those on the other side of the arguement see Emiratis hard done by compared with their cousins 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.

A six-member committee appointed by the FNC to research 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 one of the world's largest oil producing countries 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.

Standard grade gasoline in the UAE is sold at 1.72 dirham (47 US cents) per liter, less than half of the global average price of $1.21 a liter, according to the World Bank. The government pays around 1.20 dirham towards every liter of gasoline sold.

In 2010, the UAE spent 6 percent of its gross domestic product on fuel subsidies, with an average subsidization rate of 67.8 percent, according to International Energy Agency (IEA) data. Kuwait pays 85.5 percent of fuel cost and the Saudi government subsidizes nearly 76 percent.

Calls have grown in some circles for the federal government to make fuel similarly cheap for Emiratis, but analysts warn that fuel use per head is already among the highest in the world across the Gulf and that making gasoline even cheaper will only encourage more waste.  

"Many citizens in oil and gas producing countries consider low-priced energy as a guaranteed birthright," in the words of a report for the United Nations Development Programme (UNDP), which said the large subsidies prevalent across the Arab world encourage waste and are 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 says.

UAE fuel prices are set by the federal government. Gasoline sells at a fraction of what retailers have to pay for it on a global market where prices have risen sharply in line with a 50 percent increase in crude prices since May 2010. - Reuters  




Tags: gasoline | subsidy | UAEm FNC |

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