No pain, no gain

In a country where two and a half million barrels of oil are being sucked out of the ground every day, the cost of petrol is a hot topic
By Ed Attwood
Sat 25 Feb 2012 09:28 PM

So here we go again. In a country where two and a half million barrels of oil are being sucked out of the ground every day, the current hot topic is — the cost of petrol.

Last week, UAE Federal National Council (FNC) members called for the price of fuel to be slashed in line with other countries in the GCC. Cue celebrations in the streets; after all, we in the UAE are paying an outrageous price to fill up our Land Cruisers.

If you pop over the border to Oman — which I suspect that more than a few Emiratis living in the Northern Emirates and Al Ain do on a regular basis — and you’ll find petrol being sold for around $0.32 a litre. Put another, completely unscientific, way, it costs me not far off three times as much to fill up my car in Oman than the UAE.

So no-one is questioning whether subsidies are good for the consumer. But the real question is not whether prices should be cheaper, but whether they should actually be more expensive.

Any kind of subsidy is damaging to the economy. Forget fuel retailers like ENOC, which made a very public plea for help in October last year as it stared a $735m loss in the face. Cheaper fuel leads to more gas-guzzling monstrosities on the road, car benefits being included in salaries (which then get flogged to death) and the strong apathy towards public transport. Propping up the likes of ENOC, EPPCO et al is also a significant drag on Dubai’s exchequer, which is pretty hard to justify as the emirate pays off its debts.

In Iran, subsidies have been a way of life for decades. But the lack of refineries meant that authorities in the Islamic Republic were forced to fork out huge sums to ship their oil abroad, have it refined, ship it back and then sell it to the consumer for far less than it cost to get the stuff out of the ground in the first place. Official estimates put the cost of subsidising basic commodities at around $100bn every year.

Although it’s fair to say that Mahmoud Ahmadinejad’s administration has not been universally popular, perhaps his greatest legacy may well turn out to be the cuts he made in subsidies in December 2010. For a politician, it was a brave move, given that the full benefits of the decision could — by his own admission — take decades to be fully established.

Here in the Gulf, there is what appears at first sight to be a fairly simple solution. On production of an ID card, local nationals could pay the current, or a lower price, at the pump, while expatriates pay full price. After all, locals are already subsidised in other areas — such as DEWA and government housing grants — and their numbers are such that this is a move the authorities could well afford.

The extra money made at the pump could easily be channeled back into local transport authorities’ coffers, resulting in more bus services, newer taxis and potentially expanded metro services. Fewer cars would lead to less congestion and would go some way to alleviating the UAE’s position as one of the worst per capita carbon emissions offenders in the world.

But while the pain of cutting the subsidy would be less than in Iran, the impact would still be substantial. As the costs of transport rose, so too would the price of materials and goods, leading to inflation. It would probably take some years for the effects of the fuel cost rise to bed in fully, and many companies would be hit hard in the pocket. The long-term economic benefits of subsidy removal are, however, still worth fighting for.

Even if I have to sell my car.

Ed Attwood is the Deputy Editor of Arabian Business.

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