Low fuel prices put unnecessary burden on fuel retailers

On Friday, both Enoc and Adnoc announced that they were cutting their diesel prices to Dh2.90 per litre across Dubai and the Northern Emirates. Naturally, the falling global oil price raises hopes for cutting the fuel bills of motorists and transportation companies.

Meanwhile, the UAE’s petrol prices have not changed since 2010, even though global oil prices rose sharply from about US$80 per barrel in that year to well above $100 per barrel during 2011-14, then fell back sharply below $50 in the second half of last year.

There may be some room for retailers to cut diesel prices a little further, with US pre-tax and Arabian Gulf prices close to $2.60 per US gallon (Dh2.50 per litre), but the retailers still need a margin to cover distribution and service station costs.

As for petrol prices, the current regulated price of Dh1.72 per litre for “special” is still a little less than world market levels, meaning that retailers continue to make a loss selling it. During the high oil price period of 2011-13, the official selling price was barely half the world level.

It is true that the UAE has higher fuel prices than most of its neighbours. Qatar sells petrol for Dh1.52 per litre, Oman for Dh1.06, Kuwait for Dh0.85, and Saudi Arabia for Dh0.76.

However, it is very likely that Oman at least will raise fuel prices in the near future, given its relatively limited oil production and need to plug the budget deficit. In Saudi Arabia in particular, soaring transport fuel use is eating into its oil exports.

Adnoc is in the process of taking over various Emarat and Enoc stations in the Northern Emirates and Emarat stations in Dubai to cut the companies’ losses. In 2011, the Minister of Energy at the time, Mohammed Al Hamli, said that the country’s petrol retailers had lost a total of Dh8.5 billion, and the Enoc chief executive Saeed Khoory noted that his company would lose Dh2.7bn that year from subsidised fuel sales.

The three retailers – Enoc (of which Eppco is a brand), Emarat and Adnoc, are all government-owned. Adnoc, as one of the world’s leading oil producers and refiners, can cover the losses from its profits on oil sales. Enoc runs the Jebel Ali refinery, but it still has to buy oil feedstock at world prices. Emarat, with neither refining nor oil production, is doubly exposed.

But whether the fuel subsidy is covered by the companies themselves or by transfers from the government, it represents a double cost to the country. The first part is the alternative uses for the money. It could have been spent directly on transport – for instance, improving roads, rail, metro and trams. Or, it could have gone towards investments in the country’s long-term future – health care, education, environmental protection, scientific research or pensions.

The second part is the distorted incentives caused by below-market fuel prices. They make it unattractive to use public transport and lead to more driving – hence more congestion, pollution and global warming. They discourage drivers from buying more efficient vehicles, or cleaner alternative-fuel cars such as electric, hybrid or compressed natural gas.

Heavy losses for Enoc and Emarat are a drag on the companies themselves. Subsidies inhibit them from investing in better retail networks – leading to long queues at petrol stations, with the newer districts of Dubai particularly lacking. Adnoc announced on February 4 that it would build 125 new stations, and they are sorely needed.

World-class UAE companies, such as Emirates Airline, Etihad Airways and Emaar, would not have reached their current status if they had been bearing the burden of providing heavy domestic subsidies.

Of course, drivers and businesses like lower fuel costs. But this has to be weighed against the negative consequences of subsidised energy.

Robin Mills is the head of consulting at Manaar Energy and the author of The Myth of the Oil Crisis

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