Dubai Gas StationsThere’s a furore. There’s no gas at the pumps in UAE petrol stations. The UAE! Home to oil reserves the size of a small ocean. Yet, commuters are queuing up, and pumps are running dry. Why?

Quick and simple, as @rupertbu said on Twitter “It’s not as if you fill up with the crude stuff at petrol stations.” Yup, crude needs to be refined before it can run cars and whatnot.

And here’s an article on the Jpost, which quotes Gulf News. A brief excerpt:

The price of gas is regulated by the UAE government, which despite a 26 percent price increase this year alone, has forced the company to sell gas at far lower cost than what Emarat must pay to import oil. Dubai does not have any oil refineries, unlike neighboring Abu Dhabi that has two refineries and can control all aspects of production.  

“In addition to Emarat, Abu Dhabi National Oil Co. (Adnoc), Enoc and Eppco also operate in Dubai. All of these companies must sell gas at approximately $1.80 per gallon. 

“The government of the United Arab Emirates offers a $0.33 per gallon subsidy on gas sales in the country, amounting to hundreds of millions dollars every year; however, in an effort to cut costs it decided earlier this year to scale back on such subsidies.”

The issue isn’t the crude, but the refining capacity. The UAE has its own refineries e.g. Takreer. Most are under Abu Dhabi’s control. There‘s one in Jebel Ali as well, managed by ENOC. Yet, they can’t keep up with demand. And demand is a function of price – and prices are kept artificially low.

So, a simple mismatch between supply and demand, exacerbated by a price ceiling. To make up the difference, oil producers and suppliers like Eppco, Enoc, etc, buy fuel off the international spot market. And are then forced to sell it locally for lower prices. This, as one can imagine, is costly business. They’re running out of cash. Their marts, convenience shops and other services offered as ancillaries at gas stations are not enough to plug the gap.

ADNOC (Abu Dhabi National Oil Company) pumps, it might be noted, aren’t facing shortages. They’re facing massive queues. This is a given, because consumers who can’t fill up at Enoc or Eppco pumps head to ADNOC stations. Gulf News says so here.

And Alexander McNabb picked up on the issue a few days back, on his Fake Plastic Souks blog here.

Due to the…ahem…sensitive nature of the issue (no one wants to scream and point the long fingers of blame on government price ceilings, newspaper reports and official statements have blamed the problem on:

a) Logistical issues

b) Mysteriously invisible pump upgrades

c) Temporary shortages due to tankers running late

d) The dog eating the homework.

But at the end of the day, it’s simple economics – price ceilings create more demand than supply, and the gap needs to be plugged from somewhere. Usually, price ceilings result in black markets. That hasn’t happened yet, to the best of my knowledge.

Psst…I’ve got a gallon of the good stuff…make you feel real good, real mobile. Get you from Tecom to the Trade Centre Roundabout…

PS: This report by Gulf News sums it up rather well.

PPS: I was asked by @SajidIsmail on twitter why Dubai buys off the spot market and can’t run to AUH (Abu Dhabi) for cheaply refined stuff. Two reasons a) tensions and oneupmanship b) but more importantly, because AUH refineries just don’t have the capacity to handle all of the UAE at current prices. The reasons Epco, Enoc et al are holding their little “no fuel” party is perhaps to encourage AUH to sell them refined petrol at low prices, or to prep consumers for a price hike that will bring supply and demand to closer parity.