Should the UAE subsidize fuel? :: GN

Khalaf Al Habtoor, member of the Dubai Economic Council and chairman of the Al Habtoor Group thinks it should:

"The UAE is an oil producing country and oil revenue is one of the largest sources of national income. I do not see any reason to pass it on to the consumer," he said at a news conference yesterday.

"If our neighbouring states, Saudi Arabia, Oman and Kuwait, can absorb the pressures of high oil prices, why can't the UAE do the same?"

He also spoke out against the idea of taxation:

"The UAE has always enjoyed a competitive advantage as a tax-free economy which is one of the reasons behind our massive growth. We do not need to tax people when there is no economic crisis," Al Hab-toor said

"By introducing taxes, we will lose our competitive edge that we have been enjoying so well."

The UAE and its seven member states have pursued a policy of diversifying the country's economy beyond the level of diversification that would arise in an unregulated environment. One of the central instruments of that policy has been to keep the price of fuel low, in effect subsidizing businesses across the board. Low fuel prices reduce the direct cost of fuel in the production process as well the price of other inputs to production that are produced locally using fuel. This includes labor: lower local fuel costs reduce the cost of living, thereby reducing the salaries firms must pay to attract foreign workers.

Underlying calls to subsidize fuel is the maintained hypothesis that diversification of the economy is good for the country. Notice that this hypothesis runs counter to the theory of free trade which concludes that countries gain from specialization and exchange.

UPDATE. I just noticed this related story:

RIYADH, 14 September 2005 — Before its entry into the World Trade Organization (WTO), Saudi Arabia must still finalize discussions on the pricing of natural gas for petrochemical companies, according to ambassador Bernard Savage, chief of the delegation of the European Commission in Saudi Arabia. In an exclusive interview, Savage said the European Union had signed an agreement with Saudi Arabia in August 2003 for the Kingdom’s accession. He explained, “There remains an outstanding issue which is the question of the pricing of natural gas supplies to petrochemical companies. There have been extensive discussions on both sides. As far as the commission is concerned, we are pushing ahead on those and we are hoping that we can continue discussions with Saudi Arabia in order to reach an agreement in time to allow for Saudi Arabia’s accession at the Hong Kong ministerial meeting of the WTO toward the end of the year.”