It isn't just your water and electricity bill that's going to go up by 15 per cent next month. With the price of a barrel of oil hovering above $90 in the international market, pressure on the UAE’s distribution companies to hike the retail price of petrol at local pumps is mounting by the day.
With international refined prices rising in tandem with the global oil prices, UAE fuel retailers are now subsidising petrol at the pump by at least 60 fils per litre, and that is without even taking into account the cost of importing the refined product, storing it, distributing it, marketing it and eventually dispensing it to the consumer.
According to Emirates 24|7 calculations, fuel prices need to go up by at least Dh1 per litre if local distribution companies are serious about their earlier announcement about increasing prices gradually to get them on a par with international prices.
Despite the fact that the local retailers increased the price of petrol in the UAE by 35 fils in 2010, the retail price is still more than 60 fils cheaper than the benchmark 92-RON gasoline price, which is currently trading at $100.95 a barrel, its highest level since September 29, 2008.
The basic grade of petrol at local filling stations (Enoc and EPPCO) costs Dh1.72 a litre while refined gasoline (92-RON) works out to about Dh2.33 (63 US cents) a litre in the open international market.
This means that the local UAE fuel retailers, which have to import refined fuel at international prices, are incurring a loss of 61 fils per litre, not taking into account the cost of importing, marketing and operations etc.
The losses would be higher if these costs were to be added, and distribution companies would need to raise retail prices by Dh1 per litre to offset the combined cost of fuel subsidies and operational expenses.
With global oil prices now hovering above $90/b, UAE oil distribution firms are incurring losses amounting to billions of dirhams in subsidies every year. “The losses of oil marketing and distribution companies are estimated at about Dh3bn ($817m) just in 2009,” the Economist Intelligence Unit (EIU), a research firm, estimated.
“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 confirmed.
A statement issued earlier by local distributing companies, when they raised the prices for a second time this year, said they were looking to increase fuel prices gradually to get them on a par with international prices.
“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,” the statement said.
With global oil prices expected to go up even further in the coming months, the pressure on local retailers is bound to multiply. “I suspect oil will be at around $110/b by this time next year,” Dalton Garis, Assistant Professor – Economics and Petroleum Markets Behaviour, The Petroleum Institute in Abu Dhabi, said yesterday.
International observers including the EIU reckon that a third hike in local fuel prices is likely soon. “After two increases in the past months, more rises in the price of petrol are in the pipeline before the end of the year,” the EIU said in a report published in October.
The International Monetary Fund (IMF) too has recommended that countries in the region end explicit fuel subsidy in order to reform their consumption patterns and enhance industrial efficiency. “A number of governments have recently become increasingly concerned about the fiscal costs of such subsidies, the corresponding waste of resources, and the dependence of the industrial base on indefinite subsidies,” the IMF said in a recent report.
“Accordingly, some countries have begun to tackle these issues. An essential first step to that end is to identify subsidies explicitly in the budget,” it added. The IMF report maintained that “[o]ver the medium term, all oil producers – to differing degrees – will need to pursue fiscal consolidation to safeguard the sustainable use of hydrocarbon revenues, while promoting diversification and employment creation. Measures to support these goals include reorienting spending toward social and development needs, revisiting energy subsidies, and diversifying the revenue base.”
Nevertheless, governments understand that raising fuel prices a double-edged sword. While it does increase government revenues, the impact on overall inflation cannot be written off, especially if the price rise is significant.
The recent increases in the price of petrol at UAE pumps “would have added about 1.2 percentage points to the headline inflation rate,” in the country, Shuaa Capital said in a research report after the UAE increased petrol prices twice this year.
“There have already been two increases in petrol prices in 2010 (April and July), which together have increased the price at the pump by 25 per cent. Reports suggest further petrol price increases would be needed for [local oil distribution companies] to cover [their] costs in supplying the domestic market,” the investment bank said in its report.
“Dubai’s oil companies are likely to be facing greater strain as they have to purchase fuel at market prices to sell domestically, whereas Adnoc [Abu Dhabi national Oil Company] reportedly secures most of its retail fuel from its own refineries,” the Shuaa report further said.
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 said.
“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 added.
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 added.
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 explained.
“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 added.