A third round of price-hike at fuelling stations in the UAE is in the pipeline and likely to take effect before the end of this year, a global think tank has said in its latest country report on the UAE.
“After two increases in the past five months, more rises in the price of petrol are in the pipeline before the end of the year,” Economist Intelligence Unit (EIU) has said.
The research firm adds that fuel prices at petrol stations in the UAE must go up by another half a dirham or so for local distributors to break even. “The break-even price for petrol stations is still at least 47 fils/litre higher than the current level after the two top-ups this year, which amounted to an overall increase of nearly 28 per cent,” the EIU report reckons.
After a gap of around five years, the UAE increased retail prices of fuel at stations in April this year for the first time since 2005. There have already been two increases in petrol prices in 2010 (April and July), which together have increased the price of petrol in the UAE by 35 fils.
With global oil prices hovering above $83/b and EIU estimating that a barrel of oil would average $80 for the year, UAE oil firms are incurring losses amounting to billions of dirhams every year. “The losses of oil marketing and distribution companies are estimated at about Dh3bn ($817m) just in 2009,” EIU estimates.
“The announced rise comes within efforts to gradually mitigate accumulated and growing losses these companies are sustaining due to continuous surge in cost of the product,” a statement issued by the UAE’s oil distribution companies in July, when they raised the prices for a second time this year, said.
The statement added that the companies were looking to gradually increase fuel prices, which are subsidised in the UAE, to get them on a par with international market rates.
According to Emirates 24|7 calculations local petrol retailers, which import refined fuel at international rates, lose at least 22 fils/litre, which does not include other costs, such as marketing, operations and transport.
“The losses were particularly acute in 2008, when oil prices reached record levels, but they accumulated again this year as prices crossed the $80/barrel mark,” the EIU confirms.
Analysts reckon that the petrol price increases and the expectation of more price rises by the end of the year may weigh on consumer sentiment and have created some inflationary pressure. “All commodities and services relying on fuel as a major input will see the cost of production and delivery rise,” the EIU says.
“Manufactured and consumer goods will both be affected. Producers are likely to pass the additional cost on to consumers, and higher transportation costs will also trickle down,” it adds.
The public transport sector has already responded to the hikes by increasing prices in Abu Dhabi and Sharjah, and in some places taxi fares went up. The Roads and Transportation Authority (RTA), which operates the Dubai Taxi Corporation and Dubai Metro among others, was quick to reassure the public that it was not going to increase fares for its services, but it is not clear if the agency will be able to maintain the current fares if there is another hike this year.
Following the last rise of 20 fils in July, the cost of fuel in the UAE is the highest in the GCC at Dh1.72 (46 US cents) litre, which is four times as high as in Saudi Arabia, and more than triple the price in Qatar.
According to the EIU, the rethink of the UAE’s petrol pricing policy has come about for two primary reasons. “Oil companies have been pushing for price rises for some time, because the revenue from sales has not been covering the cost of production, leading to losses,” it says.
“The price increases are also aimed at curbing rapidly growing domestic consumption, which, encouraged by subsidies, has put pressure on government budgets and fuelled wasteful practices. Cutting waste should help to reduce the UAE’s high per capita greenhouse gas emissions and free up oil for export, which in turn will improve public finances,” the EIU report adds.
Early this year the three UAE petrol distributors, Abu Dhabi National Oil Company (ADNOC), Emarat, and Emirates National Oil Company (ENOC), which also operates through its affiliate the Emirates Petroleum Products Company (EPPC), formed a committee to monitor and discuss petrol prices and retailers’ losses.
The committee, which meets every other month, then recommended increases in prices at the pump. Even though a spokesperson from ADNOC denied plans for an increase in petrol prices in September, the EIU reckons that “another price increase may happen before the end of the year.”
“Recommendations of the committee formally need to be approved by the federal government, but it seems that their policy priorities are aligned,” the think tank said.
The EIU maintains that the situation of the UAE’s three fuel dispensers differs only slightly. “ENOC and Emarat source the majority of their petrol on global markets paying the prevailing international rates, suffering sizeable losses when they sell petrol to Dubai consumers at the government capped price,” the EIU explains.
“ADNOC is in a slightly better position, as it obtains its fuel from the parent company’s refineries, but still claims not to be able to make a profit on retail sales in Abu Dhabi and the smaller emirates,” it adds.
In line with the dynamic growth in economic activity during the boom years and the resulting rise in consumption, the UAE has been seeking to expand domestic refining capacity.
It was estimated at around 673,000 barrels/day (b/d) at the end of last year, coming from four main facilities operated by the Abu Dhabi Refining Company, or Takreer, and ENOC.
The current capacity of Takreer at its two refineries in Umm al-Nar and Ruwais, is approximately 570,000 b/d. Takreer awarded contracts worth $9.6bn in March this year to three South Korean companies for the expansion of the Ruwais facility. Once completed in 2014, the project will add a further 400,000 b/d, or almost double the current output.