The price of gasoline in the UAE recently went up by 15 fils per litre and this issue has become a subject for debate among specialists and many others.

This is the fourth increase in a decade as the price was kept constant between 1984 and 2001 when the authorities decided to increase prices by about 2 per cent on average. That was a small and almost unnoticeable increase of about 1.6 fils per litre. The second increase came in 2004 when the price was increased by 13 fils per litre but a higher increase of about 29 fils per litre came in 2005 and now in 2010 its 15 fils per litre.

The prices cited above are for regular petrol. But people are already expecting more hikes in the future as a statement from marketing companies said that "prices will be liberalised and increased gradually".

It may be sensed then that the ultimate target is international prices. The average price of gasoline after the latest increase is about Dh1.6 per litre while the international price in Singapore is close to Dh2.16 per litre or 37 per cent higher.

As an oilman, I am all for the rationalisation of gasoline prices provided that adjustments are timely and gradual and with due consideration given to the state of the economy.

Some economists may have reservations about the increase in gasoline prices because of their concerns about inflation at a time when the economy is recovering from the effects of the global recession.

Insignificant

Others have found the increase insignificant because the base price is already low in comparison with those internationally.

There is no doubt that petroleum products prices are important in any economy and they have a tendency to affect the price of other commodities and services.

Therefore, the low prices of the 1980s and 1990s were the reasons for large percentage increases in the last 10 years. However, it would have been much better if the two per cent increase was done on a regular basis to reach the desired price. Such increases would help the economy adjust without having the negative impact that comes with sudden, large increases.

To reduce the impact on the low income group in the UAE, public transportation must be encouraged and made available widely.

Buses and Metro in Dubai for instance should make a major difference, especially as more and more Metro stations become operational. But taxis in the UAE are being widely used by many commuters and gasoline price increases would eventually make a rate adjustment as taxi companies would not be able to absorb all the hike in fuel prices.

A cheaper fuel alternative for taxis is yet to come and it is unfortunate that the compressed natural gas (CNG) programme for cars is very slow in coming.

The problem with fuel subsidy is that are a waste as they do not encourage savings.

Rationalisation of consumer behaviour should not be approached from the fuel side only. There are other ways to address into this issue. Vehicles with the highest efficiency as much as practicality need to be imported. Gas guzzlers should not be allowed on the roads and taxation on cars should differentiate between the small, efficient family car and huge, four-wheel drive vehicles.

Argument

The price of fuel in the UAE is much higher than those in neighbouring countries. The argument that the UAE is an oil producing and exporting country and fuel prices should be low here does not hold much water.

Government subsidies should be diverted to education, health, housing, public transport and other services. Maximum savings should be encouraged in fuel even if the price instrument is to be used gradual. It is naive to say that the domestic consumption is a "fraction of the UAE's exports" as some commentators said.

Oil demand in 2008 was 355,000 barrels per day or about 15 per cent of the production of 2.63 million barrels a day or about 17 per cent of exports. It is estimated that oil demand may reach 600,000 barrels a day in 2015 and its share of the county's production will increase.

Finally, government policies should be well explained before people arrive at the petrol pumps to see a change in price.

 

The writer is former head of Energy Studies Department in Opec Secretariat in Vienna.