beyondbrics

Fuel shortages in the oil-rich Gulf can only mean one thing: crisis.

Amid the political tumult of the Arab world, petrol shortages have accompanied acute moments of distress from Libya to Bahrain.

But 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 through a new bond issue.

But for the cash-pinched emirate, perhaps the short-term reputational pain is worthwhile if it delivers a long-term resolution of the crippling economics of ENOC.

This crisis has long been in gestation. For years, Dubai’s ENOC and its Eppco subsidiary have been bleeding cash at the pump.

Back in 2004, ENOC revealed that it was losing Dh1.4m a day, as much as Dh2 a gallon, and was calling for a comprehensive solution to the problem: either large price hikes or direct subsidies for ENOC’s losses.

While the federal government has since increased the cost of petrol by more than half, ENOC still faces losses as crude prices have risen to more than twice the level of 2004 amid an expanded retail network.

For oil-rich Abu Dhabi, which straddles vast crude reserves, retail losses are easily compensated by oil revenues, especially as crude prices approach $120 a barrel.

Analysts say all UAE retailers, including Abu Dhabi, could be losing Dh16.5m a day these days.

For Dubai, the converse is true. Higher oil prices hit government-owned ENOC hard, just as they harm another mainstay of the emirate’s economy, Emirates Airline.

Reducing supplies to retail outlets in the northern emirates may fuel the appearance of a crisis, which could force Abu Dhabi’s hand.

If the oil-rich capital can subsidise its own retail petrol losses, why can’t it do the same for its poorer neighbours in the federation?

Rumours have now emerged that prices could be hiked by another one-third in response to the shortages.

Yet recognising the political challenges of the Arab Spring, Abu Dhabi has taken more responsibility for ensuring development and comfort for nationals all UAE nationals.

Nowhere is this more pressing than the poorer northern emirates, which in recent years have been hit by power cuts amid weak infrastructural development.

Many UAE nationals, famously petrol-headed in their priorities, hate government initiatives that increase driving costs, be they fuel price hikes or Dubai’s Salik road toll.

Indeed, last year a policeman was detained for trying to organise a demonstration against the increases in petrol prices.

Few economists would argue for the further expansion of state subsidies, saying it distorts the economy and promotes car use.

But given rising concerns for political stability, the federal government may opt to subsidise Dubai’s desperate oil companies rather than passing all the costs onto the consumer.

Related reading:
Domestic oil usage to vie with exports, FT
Dubai set to return to the bond market, FT
Arab rulers use handouts to ward off unrest, FT
UAE file, beyondbrics