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Mon 4 Jun 2012 03:14 PM

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"Cheap" UAE gasoline: Citizens and industry square up

Thoughts of raising fuel prices have been swept away by the Arab Spring that has put pressure on regimes to maintain social benefits

"Cheap" UAE gasoline: Citizens and industry square up
Two years ago the UAE considered phasing out generous subsidies.

Emiratis' love of cheap gasoline has caused a fissure in the UAE establishment, setting a top government body, nervous of Arab Spring unrest, against national oil companies fighting to stem losses from producing underpriced fuel for the home market.

Two years ago the UAE considered phasing out generous subsidies that mean both citizens and the larger immigrant population only pay US$0.47 for a litre of gasoline.

But thoughts of raising fuel prices have been swept away by the Arab Spring that has put pressure on regimes to maintain social benefits, despite foreigners, who make up 89 percent of the population, being the biggest beneficiaries of subsidies that squeeze state coffers and fuel retailers.

This month members of the Federal National Council (FNC), which has no legislative powers, unanimously approved plans to cut gasoline prices for everyone, after complaints that citizens pay too much to fill up.

The oil ministry is opposed to any reduction in price but it will be up to the cabinet whether to accept the FNC's recommendation.

"The oil ministry strongly opposes any increase in subsidy - we are trying to improve our economy and a subsidy increase would be a huge set back," a source close to the ministry said.

Behind the government and its long term strategy for a modern, diversified economy less shackled to oil and without the feather bedding of state energy subsidies, lies a formidable industrial lobby.

In an irony for a Gulf oil economy, domestic gasoline retailers have been hit with numbing losses, partly thanks to subsidies but also due to imbalances between the Emirates.

The combined losses of the four UAE state-owned retailers: Dubai government-owned Emirates National Oil Company; Emirates Petroleum Products Company (EPPCO); federally owned Emarat; and Abu Dhabi's National Oil Company (ADNOC), are estimated at AED8.5bn (US$2.31bn) in 2011. The oil ministry expects losses this year to reach AED12bn (US$3.27bn).

The shutdown of ENOC and subsidiary EPPCO forecourts in Sharjah and Ras Al-Khaimah forced citizens in these poorer northern emirates to drive long distances and queue for hours to fill up.

The closures, in a Gulf OPEC country that produces around 2.5m bpd of crude, was because nearly all the UAE's oil is in Abu Dhabi, forcing Dubai-based retailers to import theirs at a loss.

While they continue to do that for Dubai residents, those of northern emirates are increasingly reliant on ADNOC pump stations because as one of the world's largest oil producers it can absorb the losses.

"This was a signal that Dubai's government is no longer willing and able to independently subsidize a large portion of the UAE's population," said Eurasia Group's Kamel.

To relieve pressure on petrol stations in the northern emirates, ADNOC signed an agreement with Emarat on Monday to take over the management of 74 service stations in Sharjah and Ras Al Khaimah, Ajman, Umm Al Quwain and Fujairah.

Those on the other side of the argument see Emiratis hard done by compared with their cousins elsewhere in the Gulf.

"The Federal National Council urges the government to increase subsidies for petrol and lower fuel prices so that they match those in other Gulf countries," the FNC said in its recommendation to the cabinet.

A six-member committee appointed by the FNC to research the reasons behind high fuel prices, found the cost of petrol in the UAE was higher compared to other Gulf states.

The committee argued in its report that one of the world's largest oil producing countries should not have the third highest fuel prices in the Arab world, behind Syria and Tunisia.

"The push by the FNC is an effort to look proactive in domestic affairs, particularly regarding issues pertaining to the welfare of Emiratis," said Ayham Kamel, an energy analyst at Eurasia Group.

Standard grade gasoline in the UAE is sold at AED1.72 (US$0.47) per litre, less than half of the global average price of US$1.21 a litre, according to the World Bank.

The government pays around AED1.20 towards every liter of gasoline sold.

In 2010, the UAE spent 6 percent of its gross domestic product on fuel subsidies, with an average subsidisation rate of 67.8 percent, according to International Energy Agency (IEA) data. Kuwait pays 85.5 percent of fuel cost and the Saudi government subsidises nearly 76 percent.

Calls have grown in some circles for the federal government to make fuel similarly cheap for Emiratis, but analysts warn that fuel use per head is already among the highest in the world across the Gulf and that making gasoline even cheaper will only encourage more waste.

"Many citizens in oil and gas producing countries consider low-priced energy as a guaranteed birthright," in the words of a report for the United Nations Development Programme (UNDP), which said the large subsidies prevalent across the Arab world encourage waste and are an inefficient way of redistributing oil wealth.

"A high share of energy subsidies has been shown to be captured by higher income groups and industries... they must be seen as a costly and inefficient tool to protect the poor in the Arab world," the report says.

UAE fuel prices are set by the federal government. Gasoline sells at a fraction of what retailers have to pay for it on a global market where prices have risen sharply in line with a 50 percent increase in crude prices since May 2010.

The FNC committee said limited refining capacity was largely behind the high import needs and resulting losses of fuel retailers. But industry analysts say low fuel prices discourage investment in refining because it is impossible to make gasoline from crude without losing money.

"This six-member committee that was appointed has no idea about oil markets or how an economy works," said an official from one of the state-owned fuel retailers.

"Petrol companies are already in debt and we hope the cabinet doesn't implement this proposal."

The UAE government last hiked fuel prices twice in 2010, adding AED0.35 per liter in total, to reduce the burden of subsidies on public finances and try to encourage more efficiency.

It had been expected to raise prices further in response to a sharp rise in crude prices over the last two years but now seems likely to freeze plans for further increases indefinitely.

"The political climate resulting from the 2011 Arab uprisings will increase the political adversity facing many Arab governments pursuing painful economic reforms, including the reform of domestic energy prices," the UN report concluded.

"Rising energy prices, alongside increased prices for food and other essential goods, are sensitive and can provoke large-scale protests." The proposal would cost the banks operating in the UAE as much as AED800m (US$218m) a year, the newspaper said.

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