x Abu Dhabi, UAEFriday 28 July 2017

Three-step solution for petrol shortage

The petrol shortage requires a short-term federal subsidy to get fuel flowing again, although those subsidies will further distort the market.

There is more silence than mystery about the persistent petrol shortage that is making life difficult in the Northern Emirates. And the short-term solution is clear. Now it is time for the Federal Government to get the pumps re-opened - then we can consider a more efficient market solution.

Although fuel company executives and government officials have done little to inform the public, the outlines of the problem are no longer in serious dispute.

World oil prices are high but domestic retail petrol prices are kept low, as a way of sharing the national oil wealth. As a result, Dubai petrol retailers Enoc and Eppco, owned by the Government of Dubai, lose money on each litre they pump. As the red ink got deeper, those companies appeared to stop selling in other emirates, which do not have their own retail companies and are not as prosperous as Dubai or Abu Dhabi.

To its credit, the Federal Government has been trying to get away from artificially low prices, and there were increases last year. But this year, in the regional political climate, no price hikes are expected.

Controls and subsidies distort markets, impeding economic efficiency and discouraging innovation. In this space we have repeatedly warned of the dangers inherent in constraining markets. We certainly hope governments will remember this dilemma the next time they're tempted to overrule market prices.

But the car has to be moving before you can take a right turn. The first problem now is that there is no petrol, or too little, for sale across large parts of the UAE, a paradox in this oil-rich federation and an obstruction to the routines of daily life for ordinary people. But the Federal Government could solve the shortage with one simple promise: to pay retail companies enough per litre that they can break even.

Adnoc has been sharply increasing petrol deliveries to its handful of Northern Emirates stations; that is a useful stopgap but not a full cure.

The long-term solution to this problem is surely a rediscovery of respect for the iron realities of the market: petrol prices should be allowed to rise gradually. Adding more refining capacity in the future could also help to reduce imports.

But the short-term solution, in the interests of fairness across the federation, involves wading a little deeper into subsidies.