Dubai has spent billions to ensure that its motorists can fill their tanks cheaply, official documents show.
Federal legislation mandates that Emirates National Oil Company (Enoc), which is owned by the Dubai Government, and its subsidiary Emirates Petroleum Products Company (Eppco) sell petrol at subsidised prices.
As a result, the companies are losing money on petroleum sales, forcing the Government of Dubai to make up the difference.
"Both Enoc and Eppco have been incurring cash losses in recent years as a result of the imposition of a fixed petrol price," the Dubai Government reveals in a bond prospectus released to attract international investors to its next debt issuance.
"To compensate for such losses, the Government of Dubai provides a subsidy to both of these companies."
By the end of last year, Dubai had spent Dh5.59 billion (US$1.52bn), according to the prospectus.
"It's a major draw on already-strained government resources," said Simon Williams, the chief economist for the Middle East and North Africa at HSBC.
"Petrol prices should be higher, but it is difficult to see how they could be increased, given the social impact."
Enoc and Eppco sell petrol at Dh1.72 a litre. Unlike the Abu Dhabi National Oil Company (Adnoc), the Dubai group does not have sufficient domestic sources of crude, forcing it to buy fuel from outside at international prices. Enoc has in the past complained bitterly about running a loss on petrol sales, and last year it closed its retail network outside Dubai.
In October, the company forecast an annual loss of Dh2.7bn for 2011, a year in which oil prices rose to levels last seen in 2008.
"This also has a serious impact on our ability to expand our retail network to meet the growing demand," Enoc said.
The price of oil has continued its advance this year. After averaging about $107 a barrel last year, Brent crude sold at an average of $119 a barrel in the first three months of this year.
Petrol prices were increased twice in Dubai in 2010, and many observers believed more increases were in the pipeline.
But spending has been raised to improve the living standards of UAE nationals, putting an end to the speculation.
After the closure of Enoc and Eppco stations outside Dubai, Adnoc has started expanding its UAE-wide retail network. The Abu Dhabi company is said to have plans for 234 stations across the country by the end of the year, many of which are to be built in the poorer Northern Emirates.
The UAE is not alone in providing subsidised fuel to its residents. Petrol in the Emirates is the most expensive in the GCC.
In no other member state is fuel sold for more than Dh1.14. Petrol stations in Saudi Arabia charge the equivalent of only 48 fils.
The International Energy Agency (IEA) estimates that in 2010, governments worldwide spent $409bn on subsidising petrol consumption, increasing carbon dioxide emissions by 4.7 per cent. Only 8 per cent of the subsidies benefited the lowest income bracket, says the IEA.
Saudi subsidies on basic goods is about 10 per cent of GDP, according to HSBC.
twitter: Follow and share our breaking business news. Follow us
