Diesel price hike may cost businesses more

Petrol stations across the UAE are waiting for a formal notification on the rise in prices of petrol and diesel from Wednesday.

Along with the 15 fils increase in petrol prices announced by leading fuel companies, diesel prices are also set to go up as Abu Dhabi National Oil Company (Adnoc) Distribution, the retail wing of Adnoc, will increase diesel prices by 11 per cent, or 21 fils. It is not clear whether the others – Enoc, Emarat and Eppco – will follow suit with their own price hike.

Reactions to the petrol price have, on the whole, been cool, because it is a marginal price increase and is coming after a long period. However, the diesel price hike is expected to have a greater impact, coming as it does on top of back-to-back diesel price hikes within the past couple of weeks that were implemented by Enoc, Eppco and Emarat.

Heavy vehicles such as trucks, public buses and school buses all use diesel. Not only would the rise in diesel prices push costs up for bus and truck operators, but another aspect of this increase is it almost closes the price gap between diesel sold at Adnoc gas stations and that sold at petrol stations run by Emarat, Enoc and Eppco.

All this while, with Adnoc prices lower than that of the other three, there has been what may be described as 'diesel smuggling', ie subsidised diesel would be bought at Adnoc stations and then sold around Dubai and Sharjah, especially in the interior parts. Dubai has no Adnoc stations; Sharjah has some, but these usually have long queues.

This is how it worked: people went from this emirate to Abu Dhabi, Sharjah and the Northern Emirates, filled up their tanks – in some cases the tank capacity was artificially increased to take in more fuel – and sold it to whoever did not want to queue up or did not want to pay the legitimate price.

This racket might be hit by the Adnoc diesel price rise since the price gap will not be so wide after the increase, but it is unlikely to die down altogether.

Enoc officials were expected to make a statement about the details of the price change plan yesterday, but later backed out, saying the statement was not finalised and that all three companies will jointly make a statement.

Speaking to Emirates Business, an Adnoc Distribution source, said: "With the revised petrol prices, the retail price for one litre of E Plus petrol will be Dh1.41, for Special 95, the revised price will be Dh1.52, and for Super 98, it will be Dh1.63. Diesel prices will go up by 21 fils per litre, from Dh1.89 to Dh2.1. The petrol price increase by Adnoc is coming after a five-year gap. The last price increase was in September 2005."

The current prices per litre are Dh1.26 for E Plus, Dh1.37 for Special 95 and Dh1.48 for Super 98. At an Emarat petrol station in Sharjah, diesel is sold for Dh2.60 a litre (Dh11.20 per gallon), Special 95 petrol for Dh1.37 and Super 98 for Dh1.48.

"The diesel price here was only Dh2.35 earlier – a couple of weeks ago. We don't know whether the diesel price will go up further," said a sales supervisor. At Eppco petrol stations, the prices are the same.

An Emarat gas station supervisor told this newspaper: "We have increased diesel prices two times in the past couple of weeks and the retail price of diesel has gone up by about 50 fils per gallon. However, we have not seen any angry reaction from customers because they are used to high diesel prices. Compared to the record diesel prices that touched Dh18 plus, this increase is not very high."

At an Adnoc gas station in Sharjah, a sales supervisor said: "We have heard about the petrol price increase from the newspapers, and there is no official intimation. Many of our regular customers are surprised because they never thought Adnoc would also increase petrol prices. We are not sure whether diesel prices will increase as well, because many people used to come and buy diesel from Adnoc stations when Emarat or Enoc increased prices."

The diesel price increase by Adnoc is likely to hit the fuel racketeers hard, and legitimate customers harder. Shafiq, a salesman at an Adnoc petrol station in the Sharjah Dhaid area, said that in the past two to three weeks, the demand for diesel from agents and resellers had been going up because of the big difference between Adnoc diesel prices and others' prices.

"We've been selling diesel at Dh1.89 per litre and the difference in price compared with Dubai gas stations is more than Dh5.3 per gallon. We have been getting customers from Dubai and Sharjah who were buying diesel to resell in the open market. Even if they sell at Dh4 per gallon, they make a profit." As for the announced petrol price hike, Shafiq does not think it is too much of a bother for those who are not bulk consumers.

"We have not seen much of a reaction from customers because the petrol price has been same for several years, and the increase is only marginal. Middle class and upper middle class customers don't bother much about this increase."

Cost to consumer

Companies that have their own fleet of vehicles for delivery have also been anticipating a diesel price increase and, therefore, rule out any knee-jerk reaction. Rami Benjamin, Business Development Manager at Masafi, said: "We have been anticipating a fuel price increase and it has already been factored into our annual planning for the year. We have our own fleet of vehicles to deliver water and juices throughout the UAE and the increase in diesel and petrol prices will definitely increase our costs. However, this will not result in an increase in our product prices." Masafi is a leading mineral water and beverages company in the UAE with a distribution network spanning all the emirates.

Subramaniam Ramakrishnan, Supervisor at Condor Machinery & Equipment Rental, is less confident about his profit margin. "Costs are going up, and due to the diesel price increase, we have an additional expense of Dh2 to Dh2.5 per gallon. We get diesel in bulk from Enoc and our monthly diesel bill is Dh25,000. This fuel price increase will further squeeze our margin."

Laurent Patrick Gally, Vice-President of Research at Shuaa Capital, Consumer, Retail and Petrochemical Sectors, said that as a simple rule, higher petrol prices mean higher living costs for individuals, hence less residual income, and higher operating costs for most of companies, hence reduced profits.

"The fuel price increase will, in my view, be felt the most by low and middle income classes who currently have their own means of transportation," said Gally. "Maybe rising fuel costs will push, to some extend, some citizens to consider alternative means of transportation such as the Dubai Metro… but I don't believe that there will be a major change in transportation usage patterns at this stage just because of this increase."

He believes that the UAE is now out of the financial crisis, and so the price hike may not pinch so much, but it still could have been avoided or deferred. "We have been out of it [slowdown] for some time now. Having said that, announcing such price increases when the economy is recovering might not be the most appropriate timing, in my view." Gally added that even without this increase, petrol prices in the UAE have been higher than in other GCC countries.

"If we refer here to petrol prices at the filing stations, my understanding is that prices in the UAE are already higher than both Saudi Arabia and Qatar. So, if anything, the UAE price increase will widen the gap further," he said.

Gally added that petrol prices at the filing stations have been stable over the past few years. "Petrol prices at the pumps have been stable, even when oil was $147 per barrel in the world market… So consumers and companies alike had been spared the effects of the global oil price rise. I am surprised that the price increase will occur now, given that oil is back to $82 per barrel. When we look at the consolidated UAE budget, we at Shuaa Capital estimate the breakeven point for oil prices in the UAE at $55/bbl (oil barrel) for 2010," he said.

Gally pointed out the basic economics indicate that price increases at gas stations mean less disposable income for individuals and less profits for non-oil firms. "It is not a factor helping either consumption nor investment," he concluded.

The crackdown

About 18 months ago, Adnoc had started regulating and rationing diesel sales when the illegal resale by agents was going up.

When the global oil prices soared, the price gap between Adnoc and Enoc-Emarat-Eppco became gaping wide – the former is always subsidised and the latter move with market forces.

At this point, the problem of illegal resale became so rampant that Adnoc introduced several measures. These included rationing (one vehicle could not get fuel for more than a fixed amount) and a fuel card (this would have the identity of the company or the driver).

When the international oil prices came down, prices dropped at Enoc-Emarat-Eppco, reducing the gap with Adnoc. And the resale trade abated, too. Then, Adnoc removed most of its restrictions.

After the barriers were removed, global oil started rising again, and so did prices of Adnoc's competitors. The illegal trade resumed.

"People are buying again in bulk and some small pick-ups are coming with huge extra tanks," said an Adnoc gas station employee.

How the price mechanism works

In the UAE, retail fuel price has been regulated by the government, and whenever international crude oil prices go up, three players – Adnoc, Eppco and Emarat – tend to lose money.

For years, petrol prices have been fixed by government restrictions at Dh1.37 per litre while diesel prices sold through Emarat, Enoc and Eppco were not regulated. Diesel sold through Adnoc has been subsidised by the government, but selling petrol without government subsidy has meant losses for the fuel marketing companies.

Enoc (fully owned by the Dubai Government) sells under the Eppco brand, buys a large portion of its crude oil and some of its petrol on the open market, where prices have increased substantially. Petrol sales are profitable only if the crude price is less than $40 to $45 a barrel. At the moment, world oil prices are twice that level.

Adnoc produces petrol at a very low cost from its own crude reserves and is not affected by the international price regime. As for diesel prices, they have been deregulated – except in the case of Adnoc – and they move up or down, depending on the international crude price movement.

Diesel prices reached a record level of Dh19.25 when international crude crossed $140 per barrel, leading to a 100 per cent price difference between Adnoc and other fuel marketing firms.

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