Where is petrol cheaper, the oil-rich UAE or the famously gas-guzzling United States? On the one hand, bodies such as the International Energy Agency have repeatedly advised the Arabian Gulf countries to cut fuel subsidies and rein in wasteful consumption. The UAE last raised petrol prices in 2010.
On the other hand, in the space of a few years the US has changed from an importer to the world's largest exporter of transport fuels such as petrol and diesel. Tighter fuel economy rules and changes in consumer behaviour have reduced demand. And tumbling oil prices have dragged down the cost of refined fuels.
The result is that prices in each country are now very similar. American petrol prices, which reached US$4 a gallon in 2008 and again from 2011, have now sunk to $2 a gallon, or about Dh1.92 a litre, while “special” 95-octane sells in the UAE for Dh1.72 a litre. The difference is almost entirely accounted for by the US’s minor fuel tax.
Meanwhile, the retailers Enoc, Emarat and Adnoc have also taken advantage of falling prices to cut their charge for diesel fuel, mainly used by heavy vehicles, to Dh3.10 per litre, with US prices somewhat lower.
Falling oil prices will be a relief to the country’s petrol retailers, who have racked up heavy losses in the past years on underpriced fuel. That in turn should enable them to invest in petrol stations to serve new communities and cut down on long queues.
Lower oil prices offer a great opportunity for subsidies to be eliminated without any significant rise in the cost to the consumer. If prices do increase again in future, the corresponding fuel prices can rise moderately, the same as for any other goods.
Of course, fuel prices in other Gulf countries are much lower. Kuwait, which recently increased prices of diesel and kerosene, then brought back subsidies under pressure from parliament.
For these countries, it is even more essential to reduce subsidies and allow prices to move with the international market. As noted by many commentators in recent years, artificially cheap fuel leads to wasteful consumption, pollution, congestion and diversion of funds away from better infrastructure, health or education. The UAE uses about 200,000 barrels per day of petrol and diesel for road transport, close to a tenth of its oil production.
While Gulf subsidies persist, there is no incentive to drive a more efficient vehicle, a hybrid or electric car, or a diesel passenger car that has lower fuel consumption than a petrol model. Gas-powered and hybrid taxis and buses are starting to be used in the UAE, with government encouragement. As alternative fuel vehicles become more popular, they will need suitable refuelling and recharging spots. The country's vehicle fleet should be fit for the 2020s, not a replica of 1970s Texas.
Freeing up petrol prices needs to be accompanied by other supporting measures. Public transport networks, such as Dubai’s Metro and tram, and Abu Dhabi’s planned tram, should be extended. The planned Etihad and GCC rail networks will provide intercity transport for people and goods.
On a more local scale, communities need to make it easy to walk and cycle. The climate may be against this for part of the year, but elevated, air-conditioned pathways would work in dense urban centres, as between The Dubai Mall and its metro station.
This new infrastructure will, of course, cost money — just as Gulf budgets are under pressure from lower oil prices. Eliminating subsidies is in itself a source of funds. If this is not sufficient, investment in new transport systems can be justified by savings on congestion and pollution. Paradoxically, lower oil prices offer the opportunity to build a greener, healthier and more prosperous society.
Robin Mills is the head of consulting at Manaar Energy, and the author of The Myth of the Oil Crisis
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