WaPo covers wackynomics of Dubai

Washington Post

When its gasoline pumps started going dry in the United Arab Emirates’ poorer northern states earlier this year, Dubai’s oil company blamed mysterious service upgrades. Few believed that at the time, and now the company is dropping its subtlety, triggering an uncharacteristically public spat over fuel pricing policies. When its gasoline pumps started going dry in the United Arab Emirates’ poorer northern states earlier this year, Dubai’s oil company blamed mysterious service upgrades....By letting its farther-flung stations run empty, the Emirates National Oil Co., or ENOC, was telegraphing a message: The Dubai government-owned firm was tired of driving itself deeper into the red by shouldering money-losing state fuel subsidies that keep pump prices artificially low. In an unusually strongly worded statement over the weekend, the company said that continuing to cover subsidies mandated by the UAE’s federal government “is clearly not sustainable or viable for the company.” It was a rare public display of power politics in a country where grievances — particularly ones involving the many businesses controlled by the Emirates’ ruling sheiks — are typically resolved behind closed doors. The rift highlights Dubai’s determination to maintain its independence within the UAE federation despite a daunting debt bill, and it throws into question the generous subsidies the country uses to help buy political stability....The problem for ENOC, which also runs stations under its EPPCO subsidiary, is that Dubai has few of the UAE’s oil reserves. Those are mainly controlled by Abu Dhabi, the federal capital and the richest of the federation’s seven semiautonomous emirates. Because Abu Dhabi and Dubai don’t share their energy resources, ENOC has to buy its fuel on the open market at international prices — a situation it says no longer works....Dubai gas stations remain stocked but are often packed with long lines during rush hours. Meanwhile, ENOC and EPPCO stations remain shuttered in Sharjah, a teeming city next to Dubai that is home to many lower-income workers. Authorities there closed the company’s outlets in June after it failed to respond to demands to replenish fuel supplies, further lengthening lines at stations in Dubai....Most likely, ENOC is hoping the central government will step in to cover the shortfall between the subsidized price and the company’s costs, analysts said.

During its go-go years spread its network of petrol stations across the country soaking up markets that might have been served by the cautious Adnoc. Dubai projected itself across the country. As a strategy, it was always peculiar. Dubai simply didn't have the deep pockets to run the network at a loss. But none of that was transparent when Dubai had access to foreign lending throwing money at its other projects.

My guess is that Abu Dubai is simply squeezing Dubai and will end up owning Dubai's petrol networks.

One question I have: Why doesn't Dubai simply refuse to pay the subsidies mandated by the UAE’s federal government"? Would Abu Dhabi swoop in and embarrass Dubai by enforcing the mandate?

Abu Dhabi takes control

From what I can tell Abu Dhabi has tired of a game of chicken with Dubai over fuel prices. Since it essentially has an ownership stake in Dubai since the financial crisis it can evidently act unilaterally, taking over Dubai-owned gas stations that have stopped selling petrol.

The Gulf News reports details concerning the fuel price rules that fit conjectures I (and others) have made in the past.

Abu Dhabi: National oil company Adnoc is poised to take over the running of [Dubai-owned] Eppco and Enoc petrol stations in the northern emirates, Gulf News has learnt. They added that Adnoc has shown a high degree of interest in the matter and it will manage and run all the stations previously run by both companies.

Sources in the oil sector said that the UAE Government is moving to cancel licences owned by Eppco and Enoc in the northern emirates and allow the Abu Dhabi National Oil Company (Adnoc) to take over the running of the service stations.

Meanwhile, Eppco and Enoc are pressing the government to allow them to raise fuel prices, sources said. The two companies say that the cap on prices is leading to massive losses due to rising crude oil prices on world markets. Government sources said that both companies have released statements indicating their financial losses during the first half of 2011.

Emirates Petroleum Company (Emarat) was suffering similar losses until the UAE Cabinet increased the company's capital to about Dh9 billion at the end of last month.

They added that Eppco and Enoc have submitted reports to the Ministry of Finance and Industry recommending lifting the fuel price cap and letting the market decide what is a fair rate for fuel in the UAE.

The sentence, "Emirates Petroleum Company (Emarat) was suffering similar losses until the UAE Cabinet increased the company's capital to about Dh9 billion at the end of last month," makes no sense. You don't stop suffering losses by increasing capital. Presumably it's a bailout, a transfer from the UAE (read, Abu Dhabi) treasury to the Emarat (read, Dubai?).

Why Emarat is being treated differently from Enoc and Eppco is another question. I had assumed they were all Dubai-owned in one way or another.

I was always curious why Abu Dhabi/Adnoc allowed the second-movers (E-noc/ppco/marat) establish such a large market footprint across the country to begin with. Perhaps it was Dubai that made the error of believing that market share meant profit. It wouldn't be the only time Dubai made the bigger is better mistake.

Readers, any answers?

NYT reports on gas lines in UAE

The New York Times picks up the story of petrol shortages in the United Arab Emirates:

For the third time in the past 10 months, service stations across the United Arab Emirates have been running out of gasoline in recent weeks.

...

The Sharjah Executive Council, a government policy-making body, is putting pressure on the fuel retailers for more information, after a three-week shortage in the emirate that has forced Sharjah residents to line up at the Dubai stations that remain open.

...

Dubai’s fuel retailers typically purchase oil at market prices and then sell fuel at a subsidized cost defined by the government. At a time when Dubai is struggling with more than $100 billion in debt, the gasoline shortages are exacerbating a problem that has existed for years as the cash-strapped fuel retailers look for solutions. On the other hand, Abu Dhabi, the wealthier emirate that holds nearly 95 percent of the U.A.E.’s oil reserves, has not faced supply shortages.

...

The U.A.E. had decided earlier to phase out subsidies for gasoline and even implemented two successive price increases.

“There was talk that this would continue, although plans to pursue this in the short term have been shelved because of regional unrest,” Mr. Dauba-Pantanacce said. “It is a sensitive subject as cheap oil prices have also traditionally been part of an unspoken understanding of redistribution of the national oil wealth among the population.”

Read it all here.

Fuel shortage? Financial Times and Emirates Economist on same page

Did you hear the one about the oil-rich country that had a fuel crisis?

Financial Times

... the latest shortages in some emirates of the United Arab Emirates may stem from a different type of crisis: a longstanding economic imbalance rooted in intra-federal politics.

The petrol stations that have “run out” of gasoline are Emirates National Oil Company and EPPCO, both owned by the Dubai government.

Most affected outlets are in Sharjah, and other so-called “northern Emirates”, with more limited disturbance in Dubai. Abu Dhabi hasn’t suffered.

Initial excuses of maintenance work don’t really wash with analysts. More likely, they say, Dubai is trying to persuade oil-rich Abu Dhabi, the leader of this federation of seven emirates, to subsidise severe losses ENOC faces at the pump.

Oil companies in Dubai, which only has modest oil reserves, buy petroleum products at market rates, but they then have to sell petrol at subsidised rates set by the federal government.

The timing of these shortages is not so great for Dubai, which is grappling with a $113bn debt pile and is looking to tap the market for $5bn more....

I explained this the other day, and also back in 2008 when the same thing occurred.

I had not picked up on the part of the story where the Dubai-owned companies are taking care of Dubai, and leaving the Northern Emirates with the shortages. Traffic jams between the two cities of Dubai and Sharjah are already legendary. This adds to the chaos.

My suggestion to the government is to raise prices, and increase direct income transfers to citizens to compensate them. After all, they are only 10 percent of the population. Subsidizing through prices is never efficient, but it's especially not so if your intent is to target your citizens.

Energy rich country out of gas, electricity

It's life in the UAE and it's been going on for years.

Khaleej Times

Petrol remained largely unavailable in majority of the petrol pumps in Sharjah even as the Sharjah Executive Council’s deadline for answers from the company crept past. However, no explanations were forthcoming from the ENOC group, the parent company of retailers ENOC and EPPCO that are the most affected.

To add fuel to fire, residents of Sharjah suffered from unannounced power cuts on Wednesday and Thursday. Residents complained that power was cut for over two hours from 11am to 1pm and then again from 7pm to 9pm in several parts of Sharjah, including Rolla. Last year, frequent and unannounced power cuts during the peak summer months made life miserable for residents. The Sharjah Electricity and Water Authority (SEWA) said such cuts would not happen again.

Angry and frustrated motorists queued at ADNOC and Emarat pumps, waiting for hours for their turns. Others still headed to Dubai to fill up their car tanks. “This problem has crossed all limits now,” said an angry motorist who had been driving around for nearly an hour and finally queued at an Emarat pump. “We need answers.”

Answer: the price mechanism has been tampered with.

Shortage at Dubai-owned gas stations

Fake Plastic Souks sets up the story of Dubai-owned petrol stations that don't have gas while Abu Dhabi ones do, and one of his commenters gets close to the answer: x I suspect that in Bahrain and Oman the fuel retailers buy discounted fuel from the refiners, who in turn buy discounted crude from the national oil company, thus pushing the subsidy back up to the national oil company, which can afford to pay for it because it sells the vast majority of its oil at $100/bbl on international markets. Clearly, this practice results in a huge amount of "foregone revenue" for the national oil company because it could have sold all that crude at world prices, instead of selling some of it at a discount. This is effectively the support that the government has decided to give to Mohammed Public when he fills his car.

In Dubai, I think the retailers don't get such a good discount on fuel from the refiner (because Dubai is not oil-rich). Historically, they have tried to make up the difference by selling other goods and services at the fuel station at high margins (sweets, car washes, McDonalds franchises). But at $100/bbl crude price, that just isn't enough. The Abu Dhabi-owned petrol stations remain open; they are in the position of the national owned companies in other GCC countries. All the companies are losing money on each litre sold. It's that the Dubai companies who have decided to let Abu Dhabi be the government that keeps prices low and take a loss to keep the public happy.

As suggested by some of the other commenters the Dubai-owned companies occasionally play a hold up game in order to prepare the public for a price hike, or induce Abu Dhabi to sell to refined products to the Dubai-owned companies at a discount. The Dubai-owned companies have the biggest frontprint of retail outlets, and their closure does upset the public.

By the way, the UAE's refining capacity is in Abu Dhabi, and it is not enough to supply the country at the prices set. That is, the oil-rich UAE imports refined products.

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.