Does subsidizing UAE gasoline make economic sense?

If you make a business location more cost-competitive then it will attract more companies. Of course, if what you want to do is to make the oil sector as large as possible then charging everyone as much as possible for oil products is the right way to proceed.

Over the past few years the state-owned oil distribution companies in the UAE have lobbied long and hard for higher gasoline prices. Their argument is that it costs more to produce the refined products than the price at which they are sold: therefore the price should go up.

And go up it has, by 30% last week alone, and with another similar hike rumored for November. But are the state oil companies not already making huge windfall profits from oil prices close to $70-a-barrel? Do they really need now to make their profits even bigger by putting up local gasoline prices?

Surely one way of allowing the whole population to benefit from higher crude prices is to use this to maintain artificially low prices for gasoline? The state oil companies will still make huge profits, just not quite as big as they otherwise would be, and this money will go to support the development of a diversified economy.

The benefits of a diversified economy - and the UAE has in the past been one of the most successful oil countries in diversification - are well known.

For a start oil-only economies do not employ many people; the service sector is much better at providing jobs. Diversified economies also decline less when oil prices fall as they have alternative sources of income and stronger skill bases.

It is hard to feel that state oil companies are really being robbed in the UAE. Perhaps they ought to consider subsidizing gasoline prices as a tax on their huge windfall revenues from today's very high oil prices, and a way of giving something back to the community.

Some claim that introducing free market economics into the oil industry, and raising oil products to world price levels, is a good thing. However, it is doubtful whether the same voices would support privatization, foreign ownership and international working patterns which are also part of a free-market policy.

Surely a sensible balance between the interests of the very powerful UAE oil lobby and the rest of the economy has to be struck, and inflationary fuel cost rises are not the only answer.