Construction Week Newsletter 4th September 2004

Not everything is rosy at all times, says an old adage, which today stands true even for the flourishing construction industry in the UAE.

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By  Eudore Chand Published  September 4, 2004

Editorial Leader|~||~||~|

Put a cap on diesel prices

Not everything is rosy at all times, says an old adage, which today stands true even for the flourishing construction industry in the UAE. The sector is busy, and the mood is upbeat even during the hot summer months. Frenetic activity marks the ground while the skies over Dubai are spiked with towering cranes of all shapes and sizes lifting men, building equipment and materials in the rush to complete the myriad jobs that are being carried out all over the emirate and the country. Huge trucks loaded with building materials, buses filled with workers and gargantuan earthmovers and other specialty construction vehicles are busy across construction sites. Oil and gas driven power generation units are humming with activity. Construction machinery is well employed and earning good returns for manufacturers, owners, leasing companies and operators – returns which might have been higher had the cost of running the machines stayed within the originally estimated bands. But it has not, especially the cost of fuel. How can a mere fleet manager sitting in his dusty office keep costs under control when the mighty Organisation of Petroleum Exporting Countries (Opec) cannot manage to maintain the price of crude oil in the US $22-28 band? The ironic thing is that the price of fuel has been rising even in the region where the oil gushes out of the desert sands and the pregnant seabed. When oil hit the unforeseen $48 a barrel last month, Opec threw up its hands saying that it could not do much. Instead of taking urgent measures to bring down prices, the majority producers grouping is now planning to raise the effective band which would prompt increase or decrease in supplies. Even the band of $22-28 has not been effective, as a price above it requires only 500,000 barrels a day to be added. This is a mere drop in today’s scenario where problems at Yukos, dwindling US oil inventories, uncertainty about Iraqi supplies, looming winter demand from major Western consumer nations and the hunger of the Asian powerhouse, are pushing up prices. The 10-nation Opec production is expected to rise from 30 million barrels a day (mpbd) in August to 30.5 mbpd in September. But this will not be enough. Since 1947, only once (in the 1979-81 period during the Iran-Iraq War) has oil hit close to $60 a barrel. Continuing high prices are not going to help the construction sector in the UAE, where the prices of petrol are controlled. They were last raised from 17th April from Dhs4 a gallon for Special 95 Octane to Dhs4.75 and from Dhs5 to Dhs5.25 for Super 98 Octane. However, it is diesel that is more critical to the construction sector with its oil-guzzling dinosaurs. At the time of the petrol pump price increase, diesel was being sold at the pump for Dhs4.80 per gallon. At the time of going to press, it was at Dhs6.20 a gallon – an almost 30% hike. This is not an increase that can be overlooked even in the best of times. Today, construction activity in the UAE, and particularly in Dubai, is riding the peak. It has just about survived the cement and steel price shock, which were sudden and painful. The oil price shock had been incipient and has been gradually rising from the $35 a barrel mark mid-April to over $48 a barrel. The spurt in oil prices is also at a time when most huge projects like the Palm islands, Dubai Marina, Jumeirah Beach Residence, Dubai International Airport and Dubailand etc. have come off the drawing boards and onto the grounds necessitating both extensive and intensive use of oil-powered construction vehicles and machinery. It is difficult to plan ahead in the face of volatility in prices. But fleet managers knew that prices are continuing to rise and will rise further and they should account for that. And the government should not adopt a poor-cousin attitude towards diesel. If it is imposing strict price controls on sale of petrol, it should step in to put an upper limit on diesel too.||**||

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