Petrol price debate fuels the need for a different outlook

The burden of subsidies prevents the domestic oil companies from investing in increased refining capacity and cleaner fuels at home, writes Robin Mills.

Petrol subsidies undermine the UAE's goals of reducing carbon dioxide emissions. Delores Johnson / The National

"Energy markets can be thought of as suffering from appendicitis due to fossil fuel subsidies," says Fatih Birol, the chief economist of the International Energy Agency. "They need to be removed for a healthy energy economy."

In the UAE, however, the FNC has been discussing increasing subsidies .

The debate over UAE petrol prices features several misconceptions. One is that the petrol retailers - Adnoc, Emarat and Enoc - are highly profitable. In fact, they lose heavily on sales. Adnoc, with its own oil production, can cover these losses; the other two cannot.

Retailers' losses are sometimes blamed on inadequate refining capacity. But the bulk of the cost of petrol comes from the price of the crude oil used to make it. The burden of subsidies prevents the domestic oil companies from investing in increased refining capacity and cleaner fuels at home.

It also leaves them starved of cash for profitable overseas investments in oil and gas production, trading and terminals, which would improve national energy security, create jobs and reinforce the country's position as a business centre.

All of these retailers are state-owned companies. Every dollar they give to motorists is a dollar not available for improving public transport or roads, paying off government debts or investing in the future.

Rising domestic consumption reduces oil available for exports, and with Dubai and the Northern Emirates no longer significant oil producers, subsidies reinforce economic disparities between different parts of the federation.

It is striking, in a car-dependent society, how few petrol stations there are in the UAE, especially in the new areas of cities. The challenge of finding a station while the tank runs low is heightened in the north by the closure of the stations of Enoc and its subsidiary Eppco. This problem is caused by low petrol prices - retailers have neither the cash nor the incentive to expand their networks.

Petrol prices in the rest of the GCC are lower than in the UAE. But just because its neighbours pursue wasteful and short-sighted policies is no reason for the UAE to emulate them. And the proper comparison is with world prices: the UAE's Dh1.72 (US$.46) per litre is much lower than in Iran (Dh2.56), the US (Dh3.61) or Norway (Dh9.33), an oil exporter that taxes fuel heavily for environmental reasons.

Diesel prices, important for commercial users, have been at world levels for many years. And with UAE inflation low, now is the ideal time to begin raising prices. Why focus on cheap petrol and not on, for instance, expensive phone and internet services, technologies crucial to building a modern economy?

Higher petrol prices will improve quality of life courtesy of less congestion, easier parking and less pollution, and will also encourage the use and improvement of public transport.

In the longer term, petrol subsidies undermine the UAE's goals of reducing carbon dioxide emissions, which are per person among the highest in the world. There is no point in investing in advanced solar power and zero-carbon cities if the good work is undone by outdated gas guzzlers. Hybrid and electric vehicles need fair prices to be able to compete.

The rationale for petrol price rises should be communicated clearly, and increases should be phased in on a gradual, transparent timetable to allow motorists to adjust. If certain groups need to be shielded from higher prices, far better that this be done via a direct payment, which can be spent on whatever the recipient requires.

The debate should be not whether to cut prices, but how to bring them to world levels in the healthiest way for the economy and consumers.

Robin Mills is the head of consulting at Manaar Energy, and the author of The Myth of the Oil Crisis and Capturing Carbon