Should power and water increase next?

As the ramifications of fuel price deregulation continue to be discussed, some of the speculation has turned to whether the price of electricity and water might also be reconsidered. One might argue that the case for these utilities to more closely match their true cost of production is even more compelling than the case for fuel.

However, it is equally clear that anything that causes the cost of living to increase needs to be introduced gradually, to balance the benefit against the effect it has on the budgets of those on the lower rungs of the economic ladder. If such a rebalancing of utility costs is being considered, we don’t expect it to come imminently. Yet, we can’t help but note the beneficial effects this will have for the health of the economy.

Last year, Abu Dhabi emirate alone spent Dh17.5 billion on subsidising the cost of electricity and water. The high rate of subsidy means low costs for the consumer and little incentive to conserve supplies or use small-scale alternative energy schemes such as solar-powered water heaters.

But there is another compelling argument to reduce the distorting effect of subsidies. First, cheap power and water, in tandem with piffling prices for petrol and diesel, mean we use up more oil than necessary. This is a resource that instead could be sold abroad to the benefit of the exchequer, and by implication the greater good of the country and all those who live in it. True, there is a supply glut right now, but if one were to survey the history of oil and gas, supply and demand stretch and contract like a rubber band. Prudence would dictate that we err on the side of conserving our precious resource for greater opportunity in the future.

Next, artificially cheap everything – electricity, water, fuel – only encourages businesses to pay less heed to efficiency. We are wasteful in the way we conduct our businesses because on balance it currently costs more to be efficient. Conversely, normalising the cost of utilities would go some way towards normalising the nature of our economy. And doing this much would prompt greater attention to the needs of boosting productivity. In other words, to produce more with less. Indeed, it would also create new industries and services that serve the chase for efficiency.

Next week, we will begin to look to the market to set the price of our fuel. If we continue on this path, we might find the markets even more greatly favouring the efforts we exert on our economy.