Was 30% price hike justified? :: KT

The Khaleej Times points out that neighboring countries have not increased the price of petrol to consumers despite the run up in the price of crude, and their retail prices have been unchanged for years in many cases:

Across the border, Bahrain, with far less reserves, has not [raised the retail price] and, in Saudi Arabia, the retail price of gasoline has remained at 99 Halala per litre for nearly 10 years.

Oman, on the other hand, did hike diesel prices by as much as 40 per cent earlier this year, but the move was not linked to rising prices in the world market. In fact, petrol prices in Oman have virtually remained unchanged for years and the government had been forced to increase the diesel price in May only to check what it said was a large scale smuggling of the fuel to neighbouring countries where the rates were considerably higher.

One major difference between these countries and the UAE is that the nationals here are only 20% of the population. Thus, in the UAE, low petrol prices are an especially costly way of transferring benefits from the government to the citizens. In the last several months we have seen the government instead expand social assistance programs targeted strictly to citizens, programs like unemployment compensation and housing subsidies.

The KT article continues:

If the economic viability of a few distribution companies were the only motive, there could have been other options for a petroleum-surplus country like the UAE to spare it's economy of the huge inflationary burden it is facing today. In scenario one, as all the distribution companies in the country are government owned, there could have been a government sponsored consolidation of distribution that could have given the one and only distributor access to country's crude at production cost. In the second — and a more business-like solution – the government had the option of supplying all petroleum companies refined petroleum products at a fixed price allowing a reasonable margin.

As I noted yesterday, while the distribution companies may be government owned, their ownership varies. The national oil company Adnoc is owned by Abu Dhabi, and Adnoc is a vertically integrated company in (profitable) crude oil production and export, refining capacity, and local distribution. The Dubai-owned oil company ENOC is simply a retailer and it buys refined products at world prices. If ENOC were given access to "refined petroleum products at a fixed price allowing a reasonable margin" then Abu Dhabi would be subsidizing Dubai. Thus, I don't see "scenario two" as a politically viable option. The same goes for nationalization of distribution in "scenario one" as that would make the Dubai-based owners of ENOC quite unhappy.

In short, the UAE's greater willingness to increase retail prices for petroleum products is driven by two factors that make the UAE distinct in the region:

• citizens are a small percentage of the population
• federalism and the competing interests of the different emirates