x Abu Dhabi, UAETuesday 25 July 2017

Petrol subsidies are seductive but also carry a cost

Calls for a further reduction of petrol prices might win praise for the FNC, but if the move were enacted it would come at an enormous overall cost to the country.

A proposal adopted by the Federal National Council last week calling for petrol prices to be cut, perhaps by as much as 60 per cent, has, not surprisingly, attracted favourable comments in the media. It has also been well received by citizens and expatriates, and of course, from businesses that would be able to cut their transport costs.

The cut in prices is not a done deal yet: it first has to go to the Cabinet and then, ultimately, would need presidential approval. We'll see; the FNC argues the rule must be implemented without delay because pump prices here are much higher than they are in other GCC countries and in most of the rest of the Arab world.

While that may be true, perhaps it's time to consider a few facts about our petrol industry before people get too carried away with the idea that prices are going to come down at the pump.

First, although prices here may be higher here than in most other Arab countries, they're not particularly high in international terms. The current UAE price of Dh1.72 per litre compares favourably with the US (Dh3.8 per litre), or India (Dh4.85). The average price in Britain, where the government takes a crippling amount of tax, confident that consumers will always blame the suppliers, is currently around Dh8 per litre.

Second, the UAE's retail petrol market is more complex than many people seem to realise. The country has four retailers: Adnoc, owned by Abu Dhabi, Enoc and Eppco, both owned by Dubai, and Emarat, owned by the federal government. Adnoc produces and refines its own oil (and has just announced the purchase of 73 Emarat stations). Enoc, despite its majority holding in Turkmenistan operator Dragon Oil, has to buy fuel for local consumption at international market rates, while Eppco and Emarat also have no access to oil of their own (they too have to buy it on the open market, where the current price is just over US $100 - Dh367 - per barrel). All, including Adnoc, lose money on the petrol they sell, and have been doing so for nearly a decade, according to Energy Minister Mohammed Al Hamili. It will come out to an estimated total loss of Dh12 billion this year. It's little wonder, then, that Emarat has been having problems in paying its bills.

Any reduction of pump prices would mean that the retailers would lose even more than they are already doing, unless the federal government steps in to make up the difference. And I'm by no means convinced that such a step makes much economic sense.

Such a subsidy would have a serious effect on the long term financial viability of the three importers, at least in terms of making them dependent, or even more dependent, on handouts from the government. At the same time it makes little sense for Adnoc to sell its own oil at a loss.

I'm not opposed in principle to subsidies. They've been part of economic life here since the UAE was established and have contributed to the country's growth and development. Any attempts to remove or to reduce them would have a variety of complex economic and political implications, as we've seen with efforts to reduce subsidies for electricity and water in Abu Dhabi.

A reduction of petrol prices, presumably with a consequent increase in existing subsidies, would benefit many, but at enormous overall cost.

Before the Cabinet decides its response to the proposal from the Federal National Council, perhaps it's time to take a long, hard look at the structure of our petrol retailing industry. Enoc and Eppco have the same owner: wouldn't it be more efficient if they were merged? Does it make long-term sense to maintain Emarat as a federally-owned company, burdened by debt, even though it is being recapitalised? Or would it be better just to wind it up or to let it be absorbed by Adnoc?

I have no easy solutions to propose. The petrol retail market is a complex and sensitive one; it requires expert brains to work out the best approach for the long term and to balance the desire to provide benefits to the consumer with sound economic policy as a guide.

But I do wonder about the FNC's approach. Have they really taken all of the above factors into account in their proposal that pump prices should be slashed and that, presumably, the government should pay the enormous bill that would be incurred? Or is there just a belief that it's the government's duty to subsidise at all cost? That may be a popular approach with the public, but in the long run, it's no way to build a healthy, competitive economy.

 

Peter Hellyer is a consultant specialising in the UAE's history and culture