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Fuel price-hike: Macro economy to get boost but micro to suffer

The oil marketing and distribution companies have decided to hike the price of petrol by Dh1.5 per gallon, while the price of diesel has been increased by Dh1.40 with effect from September 1. The new increase will bring price of Octane 95 to Dh6.25 and Octane 98 to Dh6.75, while a gallon of diesel will be available at a new price of Dh7.70 on Thursday as against current price of Dh6.30 per gallon.

The new price levels, the oil companies said are part of an effort to minimise the huge losses incurred by them over the years.

Oil price, which used to be in the bracket of $34 a barrel two year back has now touched a record $70 per barrel this month and based the current price levels per gallon loss at Dh4.10.

The increase in oil prices was due for long, which made the oil marketing companies cribbing, since they were not allowed to adjust the prices according to the market realities.

The macro economic impact on economy would be of the rising oil prices in the international market means more revenues. So, it is fairly good as country stand to earn more from oil revenues, against last year's earning of Dh141 billion, which will keep the economy boiling at current levels.

The improving macro economic indicators like GDP, per capital income, balance of payment, etc would certainly not be effected by the price-hike, says an economist. But, the impact of rise in retail prices will have direct impact on inflation and a serious one, and would require the intervention of the central bank of the UAE, says a business executive.

Already inflation is breaking all earlier speed breakers. For the high-income groups, it is around 3.5 per cent, while for low-income people, it is much higher.

The grocery items had already been very expensive with the cumulative impact of a strengthening euro and weaker US dollar. So, the retailers are passing on the impact to the consumers on almost monthly basis, if not on weekly basis. There are different opinions on how the market forces in the grocery business would react to yesterday's development.

One group, spoke to Khaleej Times believed that prices are likely to escalate by 10-15 per cent within a week to a fortnight period, since the new prices would be effective from September 1, however, the transport cost would certainly be increased by 33 per cent.

Other says, it may take couple of months may be till Ramdhan to cause a fresh wave of price increases across the board, as market foresee oil prices shooting-up to a level of $75-80, in short run, with the weather calamities and political factors and over heating of Chinese economy continues to influence the international oil market.

In the micro economy, the construction sector in the country has stolen limelight with its landmarking construction projects and developments. This sector grew by 14 per cent during the year 2004, and expectations for the current year are also bullish, with Abu Dhabi coming on line with its Dh100 billion projects in hand. But for the construction industry, the largest employer in the country, say it is facing a severe cost pressures since oil consumption amounts to 10-12 per cent to a project cost.

"We operate our machinery, cranes, lifts, generators, transport raw materials, and construction workers... so if the fuel prices are going up, it means we are in problem", said one senior manager, at a large construction company.

Either developers would have to raise the cost of project, which would ultimately increase the unit prices, in an economy where recent increase in interest rate has already upped the cost of borrowing. The question is whether it is feasible to purchase a property in the current scenario, when premiums on property are shrinking?

The country imports $33 billion worth of food and its various items to feed its population, consumer goods, raw materials to run its industries.

Last week some shipping lines operating to Middle East issued trade notices raising their freight charges. The fear is that they would continue to raise these charges in near future also, as the oil prices are likely to maintain their bullish trend for another one-year time.

So, if freight goes high, so does the cost of imported raw materials and finished goods cost, adding its impact on the overall price-rise scene where land transport still has to add its cost.

The high income groups in the country have not felt any dent to their deep vaults, but the middle and lower incomes group which are just below 75-80 per cent of the total population stands virtually no where.

Already vulnerable to even minor financial shock or what we can call a "tremor", people belonging to these groups have already started taking remedial measures. Many have sent their families back home, while those who have not decided yet are weighing the viable option. With cost of education, medical treatment along with rents, taking a serious shape, in a long run, it would shrink the consumer base in the country and may create social problems.

The people who earn Dh1, 000-2,000 would be in a real fix, the food they eat would be little expensive, the bus they take to office would be charging extra 0.50 fils and all other services they use will cost some more fils.

All said and done. The million-dollar question is whether yesterday's hike in petrol prices will be the last rise or shall we expect many such increases in future?