x Abu Dhabi, UAETuesday 25 July 2017

Petrol shortages need a national policy solution

The petrol shortages in the northern emirates are the result of a flawed policy on price controls. But The National's business editor has found one possible solution, from an unlikely source.

Petrol is a political hot potato the world over. In the past three years, price hikes at the pump have triggered riots in Indonesia, Uganda, Yemen and Bolivia to name just a few. In Venezuela, the government spends more money on keeping petrol at 3 US cents (11 fils) a litre than it does investing in its entire oil and gas industry. Nigeria spends $4.2 billion (Dh15.4 billion) on fuel subsidies every year, more than twice its education budget. In the UAE, the Federal Government's price controls have undoubtedly been the main cause of the shortages that we have seen in recent weeks in the northern emirates.

It doesn't have to be this way.

The flaw with the current approach is that we have a fixed price for petrol across the Emirates, but no policy of subsidising fuel suppliers to compensate. So whenever the cost of petrol on the international market rises above the retail price, marketers such as Enoc and Adnoc make a loss. These companies are owned by the governments of their emirates, Dubai and Abu Dhabi respectively, and might decide to take a hit in their home markets, but they have no official mandate to absorb losses in other emirates.

Over the past year, prices on the international oil market have moved in one direction - upwards - and now stand at about Dh3 per litre for unleaded petrol. But retailers are forced to sell at Dh1.72 per litre in the UAE and the Government is locked into a situation where any change in the price is a political decision.

So a short-term solution would be for the Federal Government to pay marketers a subsidy to compensate for losses on selling petrol at the official price. This might end the shortage, but do we really want to go down a road that has turned into a dead-end for others?

In a country where there are few public services to speak of, such as Nigeria for example, it could be argued that a subsidy on the price of petrol is the only tangible benefit citizens receive from the country's God-given natural endowments. But in the Emirates, with its generous state benefits, this argument doesn't hold water. The Government already spends Dh6 out of every Dh10 it receives on public wages and benefits, according to a recent survey by McKinsey.

In Europe, motorists not only pay market rates for fuel, but in some cases stump up another 300 per cent in tax to their governments.

These nations, like the Emirates, already provide a host of public services and safety nets for the least fortunate, so nobody should reasonably expect handouts in the form of cheap fuel. Moreover, governments have concluded that while cheap fuel might be popular, subsidies constitute a public disservice by pushing people out of public transport and into cars, while encouraging smuggling, waste and pollution.

Perhaps surprisingly, Nigeria can offer a solution.

Africa's largest oil exporter suffered from social unrest linked to petrol politics for decades, and the country was blighted by frequent shortages. Every time the government raised the price to catch up with world markets, the unions called strikes. They often lasted days or weeks and cost billions of dollars to the economy. So a committee composed of unions, oil companies and policy makers came up with a plan.

The principles behind the new policy were, first, that pump prices must follow global trends, allowing market forces to drive supply. Second, that consumers should be protected from fluctuations on international markets, because they could stoke inflation. Third, that fuel should not be considered a channel for subsidy, because this would benefit the wealthy more than the disadvantaged and be more costly than targeted benefits.

The solution was to establish a "managed float" for pump prices combined with a regulated stabilisation fund. A regulator would dictate the maximum pump price on a monthly basis, with changes restricted to a fraction of 1 per cent every month, either up or down. When the maximum retail price is below the wholesale cost, then marketers draw on the fund, which acts as a subsidy. But when international markets fall and pump prices are above the international cost, marketers pay into the fund.

It might take a one-off investment to start it up as prices rise gradually to meet international levels. But such a system would take the politics out of the fuel equation, and encourage competition in the sector while also protecting the consumer. Whatever the reasons for the shortages in the northern emirates, there is no doubt that the root of the problem lies in the absence of a comprehensive pricing policy.

So, you might ask, was the policy successful in Nigeria?

Like so many good plans, it was never actually implemented, perhaps because there were too many vested interests protecting the subsidy regime, which fed an illicit trade in cheap fuel across borders. But that shouldn't stop the Emirates from borrowing the idea.


Tom Ashby is the business editor of The National