Subsidies look increasingly unsustainable as soaring oil squeezes debt-hit emirate
Dubai, the second-largest of seven sheikhdoms in the UAE, has stopped supplying gasoline to its neighbours as subsidies on fuel prices squeeze the city’s ability to service and repay debt.
Emirates National Oil Co, a Dubai government-owned refiner and operator of service stations, closed filling points in neighbouring Sharjah and restricted supplies to other northern emirates last week.
Dubai has $16bn of publicly held debt maturing later this year, International Monetary Fund data show. The emirate plans to cut “subsidies and transfers” by 50 percent to AED2.67bn in 2011 from a year ago, according to a government forecast.
“Below-market retail prices - without a way to make up the losses - is an unsustainable situation,” said Rachel Ziemba, a Middle East analyst at Roubini Global Economics in London. “The Dubai government continues to be cash-strapped, and this is one of the reminders that just because its companies are restructuring, it doesn’t mean that Dubai Inc. is out of the woods yet.”
Dubai borrowed at least $129bn to turn itself into a tourism, trade and financial services hub, according to Credit Suisse Group. It had to seek support from neighboring Abu Dhabi after the global credit crunch pushed property prices down by more than half from their peak in 2008 and forced some state- owned companies to seek changes to payments.
Last week’s move came after authorities in the federal capital Abu Dhabi, wary of stoking discontent amid popular uprisings in the Middle East this year, refused to let gasoline retailers raise prices. ENOC said last month it may have to spend AED2.7bn ($740m) this year to cover the cost of selling gasoline and diesel at below-market prices. Oil prices have risen to the highest since peaking in 2008.
Gulf monarchies have boosted social spending this year in the hope of staving off the unrest that has toppled regimes in Tunisia and Egypt and led to armed conflict in Libya. Oil prices averaged $94.60 a barrel in the first quarter compared with $78.88 in the same period last year and $43.32 in 2009. Crude in New York hit a 2 1/2 year high of $114.83 last month.
“International oil prices have been increasing and so has domestic consumption, hurting ENOC’s cash-flow, yet Abu Dhabi refuses to lower subsidies,” said Thad Malesa, an independent energy analyst based in Dubai. “There have been no price increases in the Gulf since the Mideast protests began, as governments want no cause for similar opposition at home.”
The UAE federal government fixes retail prices for gasoline and diesel at prices that are below retailers’ cost. It has left prices unchanged this year even as crude rises to 2 1/2 year highs. Last year, the government allowed two increases in pump prices.
Regular gasoline now sells nationwide in the UAE for AED1.72, or 47 cents, per litre, or $1.88 a gallon. In comparison, the average price in the UK was £6.18 a gallon ($9.88), according to a June report from the Automobile Association, and $3.65 a gallon in the US as of June 20 according to the Energy Information Administration. Saudi Arabia, the world’s biggest oil exporter, charges 17 cents a litre at the pump.
An ENOC spokesman declined to comment. A Dubai government spokeswoman didn’t respond to an email requesting for comment, and an official in Abu Dhabi National Oil Co public relations division didn’t answer calls to his office and mobile phone.
Fuel in Abu Dhabi, the largest of the country’s seven emirates, is sold exclusively by state-owned Abu Dhabi National, known as Adnoc. Abu Dhabi holds more than 90 percent of the UAE’s oil reserves and refines and sells its own crude. Adnoc can offset losses at home by selling crude in other countries, while ENOC must buy fuel at international market prices and sell it locally at a loss.
Abu Dhabi collected AED270bn ($73.5bn) from sales of oil and gas in 2009, almost half of its gross domestic product, according to statistics in a prospectus for Waha Aerospace BV, a unit of leasing company Waha Capital PJSC, released last year. A separate prospectus for a Dubai government bond shows that the mining, quarrying, oil and gas sector contributed only AED5.37bn, or less than 2 percent, to that city’s GDP that year.
Emirates General Petroleum Corp, the third of the UAE’s three gasoline retailers, is restructuring and needs loans to fund its sales at below-market price, Chairman Obaid Humaid al- Tayer said in January. Emirates General, known as Emarat, had a debt of AED1.9bn at the end of 2009, according to a report distributed by the State Audit Institution.
Emarat is a federally-owned retailer with no oil of its own and has to buy everything it sells from the international market.
Emarat agreed to buy at least 100,000 metric tons of regular gasoline for supply this summer to help cover the shortage in Sharjah, two people familiar with the transaction said. Emarat will buy four cargoes of gasoline from Total for delivery starting next week through September, said the people who asked not to be identified because the sales are confidential.
“Some refining businesses are struggling to make money as oil rises, especially if domestic oil product prices are much lower than those in the international market,” said Scott Darling, a Dubai-based analyst at Nomura Holdings. “Dubai entities are now penny-pinching, compared to during the 2008 boom, so cannot afford to sell at a loss.”
ENOC has defrayed its losses on gasoline with sales of naphtha, jet fuel and diesel, which it refines in Dubai and trades at market prices. It also owns 51.5 percent of Dragon Oil Plc, a Dubai-based energy explorer focusing on projects in Turkmenistan.
Still, ENOC spent AED1.5bn in 2010 to cover the gabetween its cost for gasoline and the retail price it was allowed to charge. The company needs oil prices of at least about $45 a barrel to break even on gasoline sales, Chief Executive Officer Saeed Khoory said in a January 2010 interview with local newspaper Al Ittihad.For all the latest energy and oil news from the UAE and Gulf countries, follow us on Twitter and Linkedin, like us on Facebook and subscribe to our YouTube page, which is updated daily.
It is time for the Federal authority to scarp the fuel oil subsidy, after all they don't subsidize the weekly food shopping, so why subsidize the luxury of transport.
To increase the revenue they should also double the price of cigarettes...following on the path of many countries introduce a FAT tax for fast food outlets..
It will increase the inflation and Abu Dhabi being number 3 oil producer should easily be able to afford the oil subsidies. We are not saying anything about UK economy and credit card default options that UK citizens find a loophole and staggering soverign UK loan.
It is correct that ENOC closed filling points in neighbouring Sharjah and restricted supplies to other northern emirates last week till today . The problem is that ENOC is owned by Dubai government that is short of cash , ENOC monthly sales is aprox. One million barrel of Gazoline with losses of USD 50 per barrel , leading to 2.2 Billion Dhs losses for a whole year . However the Federal government is subcidinsing the fuel sales in the other fuel retailers and not ENOC , thus it is reasonable for Dubai owned retailer to cease subcisizing other emirates in fuel sales , as this duty is purly a federal pay . In regards and as per the UAE constitution the federal gevernment must pay for the subcidies to ENOC , failure to do so will create the closure ENOC sales to other Emirates . The only one solution to the whole fuel problem is to remove any fuel subcidies and free the pump prices at the same time increase the salaries for all UAE nationals by a suitable amount.
Why increase the salaries of UAE Nationals only? Are they the only people who would pay the higher petrol prices? So to be fair under your propoasl everyone should get a higher salary to pay for the increased fuekl charges but where might I ask are their employers going to get the extra money from to fund such increases? These are hard times right now so cash is tight for everyone but more importantly such an idea would only add massivley to inflation and push Dubai into a spiralling economic crash. You may be an energy expert but perhaps you need to brush up on some common sense.
I agree with the others. The UAE needs to bring prices to at lest 80% of prices in the UK. Maybe the change can be done in phases, with the first phase being 4 dhs per litre and then 5 , then 6
The price oil is not coming down anytime soon, and may even reach 150 $.
The sooner prices are raised, the sooner people will start riding buses and cycling to work. It is also a waste of fuel when people go to malls far away, high fuel prices will lead people to shop at only their nearby malls, thus reducing traffic congestion.
Sounds reasonable; personally, I do not mind paying extra at the pump and lesser consumption of gasoline will definitely help the environment and conserve energy. However, removing gasoline subsidies will raise inflation and increase the cost of doing business in Dubai. If KSA and other GCC countries continue to charge substantially less for energy, then adversely affected businesses will find it tempting to move out of Dubai, with the obvious consequences to the economy. It is a balancing act and I am sure that people in charge are weighing the alternatives.
can you qoute the gasoline prices net of tax pls, UK charges more in tax than the actual price of unit of petrol i.e. more 50% of the price per unit in the UK is tax and for the USA is tax and transport should be adjusted or stripped out for comparison. More realstic price for Dubai or UAE to charge is around 2 dirhams a litre. Since you strip out cost of transport being from AD or even Saudi Arabia. Bottom line some one need to make money to pay other debt and not ENOC or EPPCO debt.
The only solution is to increase price of fuel. If people in the UK can pay 10$ a gallon, people in the UAE can pay that as well, last time i checked people were actually moving here because of higher pay. A price of 4 dhs per liter instead of the present 1.7 dhs would be a good start and then it can be increased to international levels.
Also, oil will never drop below 90$ and may even reach 150$ as it reached in 2008, so we might as well start paying fair rates now.
This will force people to use buses and cycle to work and will also prevent needless day trips.
I cant understand why do people in Sharjah go to MOE in weekends and people from Dubai go to Abu Dhabi? This wastes fuel and increases traffic, its far better for people to live in their locality and go to the nearest mall unless absolutel necessary.
Dhs 18 to fill my car up in Saudi. I use the SR 1 notes (no SR 1 coin unfortunately) that i have collected in my bedside drawer during the week to cover my petrol costs. Long live subsidies.
It will not solve the problem. What about U.A.E. nationals who are not employed by the Government?
It will be more practical if ENOC can get part of their supplies from Abu Dhabi instead of the international market for the time being. When the time is favourable, price of gasoline can be increased slightly.