Famine amidst abundance


James Coyle

Oil Fields in the UAE. The red splotches are almost too small to see.

Oil Fields in the UAE. The red splotches are almost too small to see.


For the last week or so, there has been a slow-boiling hubbub in the normally very timid press about petrol shortages creeping across the UAE. The irony is that whilst the UAE as a whole is raking in the money from astronomical oil prices, at home the petrol pumps are running on fumes.

Almost without us noticing, gas stations have started closing, and curiously, it only seems to affect the poorer Northern emirates, leaving Dubai and Abu Dhabi relatively unaffected, save for the queues. The official line is that the petrol stations are undergoing “upgrade works” and should be back soon.

This certainly says something about the organisational capacity of oil companies. But it also says a lot about how the UAE functions as a single country. The UAE is a federation of seven Emirates – the largest is Abu Dhabi in the south, followed by Dubai, and then a cluster of 5 smaller ones as you move up to the ‘tip’ of the Arabian peninsula. Despite the reputation for fabulous wealth, the overweening glitz and luxury of Dubai, the reality is that the raw wealth of the UAE is quite poorly distributed between the emirates.

The bottom line is that deep under the sand, the oil itself isn’t distributed evenly within the UAE. Take a look at the map – The Purple line I’ve drawn roughly marks the Dubai/ Abu Dhabi border. The blue splotches are oil & gas fields that belong to Abu Dhabi. The tiny red splotches belong to all the other emirates… You could almost overlay GDP data onto the back of this, and the pattern would be identical.

In Abu Dhabi, for example, the net value of government social previsions works out to about $11m for every man, woman and child. That’s their share of money in the bank, the accumulation of 50 years of the government saving its oil profits. However, drive out to the small mountain towns (or even to downtown Ras Al-Khaimah),and things change substantially. You’re still in the same country, but these slightly scruffy places remind me of the more distant towns I visited in Mexico or China.

Although it seems logically appealing that petrol should be abundantly cheap in the UAE, it actually isn’t quite that straightforward. The UAE lacks much refining capacity, so the fuel firms here have to buy finished gasoline at the market rate. They then have to sell it to consumers at a price approved by the federal government, which works out to about $45/barrel.

Crude Price since 1988

Crude Price since 1988

The second chart shows you what THAT means for the fuel firms. Buying oil at $100/barrel and selling it at less than half the value is, simply put, a fools errand. And they’ve been doing it now for nearly 6 years. Almost unbelievably, in a land of fabulous oil wealth, the 3 major Petrol firms will lose $800m in the UAE this year.

Perhaps unexpectedly, I suspect they’ve had enough. Since they lose money on every litre they sell, there is simply no reason to keep on selling. Just like a faulty power grid, they’re load-shedding the poorer parts of the country, just as people switch on their air-conditioners for the summer and retail demand soars. The one place that ISN’T seeing any shortages is Abu Dhabi, whose main oil company, ADNOC, controls the wells, the refineries and the gas stations, and is able to transfer-price within the much larger organisation.

Despite this, most Gulf nationals regard cheap gas a birthright. The UAE simply couldn’t function without it. And that means it is an INCREDIBLY sensitive topic – remember that “Blackbery ban” that the UAE announced in December? When the price of gas went up for the third time last year, people in one of the northern emirates, Ras Al Khaimah, started venting their dissatisfaction via Blackberry messenger. Putting up the price of gas again this summer would be deeply, deeply unpopular amongst all sectors of the economy.

Given the UAE’s penchant for grand developmentalist projects, I think we’re all kind of hoping that they’ll decide to build a huge new refinery JUST to serve the local markets, using local oil and selling it at local prices. They might position it in one of the northern emirates as a development project. Its not beyond the realm of possibility, but would take years to deploy.

The local papers are (I suspect under some official guidance) preparing us for free-floating fuel costs, talking-up the benefits of how it guarantees supply. You can imagine how popular this is going to be. A long hot summer awaits.


Photo courtesy of Bloomberg.