Irony watch: Fuel shortages in the oil-rich UAE

These shortages are caused by something like price controls: state-owned retail fuel companies that are not willing (and, perhaps, able) to meet market demand at the price they have set, but are also not willing increase price to stave off shortages.

Story 1

Employees at petrol stations in Fujairah and Ras Al Khaimah say the Special variety ran out days ago, insisting that they have not been informed when they could expect further supplies.

The shortages also affected Sharjah, Ajman and Umm Al Quwain, but the company does not have a presence in Dubai.

Story 2

Abu Dhabi: A diesel shortage affected many sectors in Abu Dhabi on Monday, with trucks stuck in massive queues waiting to refuel.

Households and restaurants suffered due to a lack of a supply of essential items. The transportation of labourers from worksites to their accommodation was also affected.

Diesel vehicles have had to queue at fuel stations in Mussaffah since Sunday morning, as the sale of diesel was stopped in Abu Dhabi City.
...
The huge difference in diesel prices between Abu Dhabi and Dubai has caused massive queues at Adnoc Distribution diesel pumps, where Dubai-registered vehicles queue up for cheaper diesel.

Most petrol and diesel consumed in the UAE is refined outside the country. Adnoc, owned by Abu Dhabi is not under pressure to be profitable. The Dubai-owned companies are, but have been reluctant to set prices above Adnoc's. This reluctance has broken as world prices for oil rose considerably in the last year.

Raise the price; end the nonsense

State-owned Adnoc (Abu Dhabi National Oil Company) persists in pricing diesel well below its competitors. Truckers naturally flock to Adnoc, creating long queues that spill out onto the streets causing traffic jams. It's a problem I identified before. Now the manager of Traffic Affairs at the Ministry of Interior is getting into the act.

The reasonable solution would be for Adnoc to raise its price to the market level. That's not what Adnoc is proposing however. The Nation reports,

Col Gaith al Mazroui, the manager of Traffic Affairs at the Ministry of Interior, said talks were under way between the department and Adnoc to find ways to end the congestion.

Col Mazroui said the Traffic Affairs Department had suggested diesel sales to lorries heavier than two-and-a-half tonnes be limited to specific hours of the day.

Adnoc should consider setting up dedicated diesel vending forecourts on roads outside of the main urban areas, while it had been advised to increase the number of diesel pumps, said Col Mazroui.

Adnoc should begin a publicity campaign urging drivers to fill up only when it was absolutely necessary, he added.

A meeting would be held soon to decide on the proposals.

Congestion at the Adnoc stations is mostly limited to the northern Emirates, which has just 49 Adnoc petrol stations to service Sharjah, Ajman, Ras al Khaimah, Umm al Qaiwain and Fujairah. By contrast, Abu Dhabi has 127 Adnoc stations.

Read it all here.

There would be many would be grateful if the traffic congestion created by underpricing was solved. I wonder what the politics are that inhibit Adnoc from simply raising the price on diesel.

Arbitrage opportunity

With price differences like this it's worth it to drive your truck to Abu Dhabi just to refuel. That doesn't help the traffic congestion problem between Dubai and Abu Dhabi.

Gulf News

The price of diesel at Dubai's filling stations has increased by 40 per cent in six months, making it almost 80 per cent more expensive than that sold by Adnoc-operated pumps in Abu Dhabi.

The price of diesel per gallon went up from Dh14.30 to Dh15.30 in Dubai last night, the single biggest increase since October. Diesel sold at Dh11.00 per gallon in the city on October 23, according to transport industry sources.

Dubai fuel retailers Emirates National Oil Company (Enoc), which operates Enoc and Eppco brand service stations, and Emarat have been raising diesel pricing for several months, citing high international crude prices.

In other news, the UAE is doing is part in the world food price craze, buying high in order to create a strategic food reserve.

Petrol price increase in the offing?

Unlike some of its other fuel-rich neighbors the UAE has a history allowing the price of petrol at the pump to track more closely the level and movement of the international price of oil. The price of oil has increased considerably. Based on that record, an increase in the retail price is overdue.

Gulf News

The sources said Dubai-based oil retailers - Emirates National Oil Company (Enoc), Emirates Petroleum Products Company (Eppco) and Emarat - which buy gasoline from several sources are more susceptible to spikes in crude prices than the Abu Dhabi-based Adnoc Distribution, which sells fuels sourced entirely from the Abu Dhabi National Oil Company (Adnoc), the main UAE crude oil producer and refiner.

Oil company executives would not confirm or deny whether they have gone with their requests to the government to be allowed to increase the fuel prices.

Though Enoc has a 120,000 barrels per day refinery at Jebel Ali, it does not produce any gasoline as of now, and the bulk of what it sells, it's widely believed, is sourced from Adnoc at prices which are government-determined. Enoc, Eppco and Emarat sell gasoline at prices that range between Dh6.25-Dh6.75 per gallon.
...
The oil industry sources claimed Enoc and Eppco are losing up to Dh4.5 a gallon for every gallon of gasoline sold, which includes storage costs.
...
An executive at Adnoc Distribution said that there's no indication from the government yet on whether there would at all be any increase in oil product prices in the foreseeable future.

"As the marketing arm of Adnoc, we are there to implement the strategies of the government and will follow exactly what we are told to do. Our main purpose is to serve customers at our service stations and that's precisely what we have been doing," said the executive, requesting anonymity.

ADNOC to invest heavily in refining capacity :: Khaleej Times

"Abu Dhabi National Oil Company (Adnoc) is investing heavily to increase the quality of fuels and raising country's refining capacity, aiming at becoming a major player in the regional fuels market."

Currently the UAE consumes more petrol than it refines.

What I'm reading, March 5, 2006

SPORTS - politics, the crossover sport
= Gateway Pundit: Bush Goes to Bat in Pakistan - Includes pics of W making a reasonable approximation to a as batsman and as a bowler. What's this about the clash of civilizations?

= Curling for Columbine. Why is Canadian Broadcast Corp outsourcing it sportscasting to an American?


CULTURE
= How the internet is assisting in the project to preserve culture in a world where the spread of English threatens local languages. And ending Intellectual Isolation, for those who chose to avail themselves of the opportunity.

= Another economist takes on polygamy


TRAFFIC - be afraid, very afraid
= Buckle up Abu Dhabians - Actually, I find this a bit disconcerting. If I inject with a safer inside to your car, I think you will respond by driving major dangerously. I hope enforcement is as successful as enforcment of the reckless driving laws are in the UAE.

UAE FINANCIAL MARKETS
= Spread the wealth. I like the way His Highness, Shaikh Mohammed bin Rashid Al Maktoum, Vice-President and Prime Minister of the UAE and Ruler of Dubai, thinks. Like an economist. My recommendation: Extend this concept in two directions. Open it to all UAE nationals. Second, include ownership in the ADNOC (Abu Dhabi National Oil Company) and the Abu Dhabi Investment Fund.

Takreer to increase refining capacity 60% :: Khaleej Times

Quote:

The Abu Dhabi Oil Refining Company (Takreer) plans to build an oil refinery in Fujairah with an investment of $4 billion. The refinery, designed to process high-grade petrol, diesel and related products, will have a capacity of 300,000 barrels per day (bpd), a Takreer official confirmed to Khaleej Times yesterday.

'Takreer chose Fujairah for its convenient location and also because it wanted a major refinery far away from Abu Dhabi, primarily as a safety back-up that might eventually even replace the existing refineries in the future,' the official said. Takreer, a sister company of Adnoc, has not yet appointed a project management consultancy (PMC) provider. The company, however, is expected to invite US companies Bechtel, Kellog Brown & Root (KBR), Fluor Corporation and Foster Wheeler among others. . . .

This Seoul Times article does a nice job of outlining the current tightness in oil refining capacity.

ADNOC says no further increase in retail fuel prices :: WAM

At the time of the recent hike in retail petrol prices it was reported that this was step 1 of a two step hike. ADNOC says, rather emphatically, there will be no further increase in its prices:

Abu Dhabi 18 September, 2005 (WAM)--An official source at Abu Dhabi National Oil Distribution Company, ADNOC, stated today that the company has no intention at all to increase vehicles' petrol prices in the future.The source, in a statement to the Emirates News Agency, WAM, said that ADNOC announces to the public that it shall not increase fuel prices for vehicles in the future in any manner.

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

Fuel prices to go up by 30% September 1 :: GN

Quoting:

Abu Dhabi: Petrol prices at fuel stations across the UAE will be dearer by more than 30 per cent from tomorrow, following a decision by local distributors to charge more.

In response to my earlier post asking how petrol prices are set in the UAE, one commenter wrote "gas price is set in abu dhabi. the retailers have no choice at what price they sell" and another wrote, "All petrol retailers in the UAE are gubment-owned (Eppco, Enoc, Emarat, Adnoc) since Caltex pulled out. They all operate at a loss, because the Gubment sets the prices." The comments match my understanding (except that I didn't know about the Caltex exception).
And although the retailers all have outlets across the UAE and are government owned, the ownership differs. For instance, Adnoc is Abu Dhabi owned and Emarat is Dubai owned -- and their objectives are not the same. You don't read of Adnoc complaining of low prices. This suggests Abu Dhabi's objective is to share the nation's oil profit with the citizens and/or to subsidize the non-petroleum sector of the economy. The complaints of other retailers about low prices suggest their objective is profit. That retail prices were low relative to wholesale refined products gives credence to the claim that the power to set prices is in Abu Dhabi.

How low are prices? The new price of 95% octane petrol is 6.25 dirhams per imperial gallon. An imperial gallon is 1.20 US gallons. The fixed rate of exchange is 3.68 dirhams per dollar. That works out to $1.42/US gallon.