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What lies ahead?
Published in Al-Ahram Weekly on 19 - 08 - 2004

As oil prices hit new record highs, Sherine Nasr finds out how the local market is adjusting
This week, oil prices hit an unprecedented $46 per barrel amid intense unease caused by political unrest in many parts of the world. In Egypt, concern is focussed on whether or not the international oil scene will eventually compel the government to adopt a new fuel pricing policy. While government officials are positive that fuel prices will remain the same, energy experts believe that skyrocketing international oil prices may give the government a good excuse to act otherwise if it so intends.
This comes at a time when the Egyptian General Petroleum Corporation (EGPC) has introduced, on an experimental basis, new, high quality, lead-free gasoline at a higher price. Aimed at servicing the most up-to-date and sophisticated types of vehicles, octane 92 and octane 95 gasoline sold for 140 piastres and 175 piastres per litre respectively. The new product is available in a limited number of fuel stations, mainly situated in high-class downtown suburbs in Cairo and Alexandria and the Northern Coast.
Appearing for the first time in the Egyptian market in March, the new product did not receive a warm welcome by consumers. "Why pay more if I can pay less and still feel no difference in the performance of the car," commented a client who was fuelling his car in a downtown gas station.
According to Medhat Youssef, deputy chairman for operations of EGPC, producing high quality gasoline to measure up with the requirements of highly sophisticated engines is a challenge. "In addition to providing a lower ignition temperature and burning less fuel, the new product complies with environmental production criteria, which are becoming more restrictive," said Youssef, adding that producing the new gasoline addresses diverse needs in the market.
Meeting these diverse needs, however, was not the ultimate aim for EGPC. Rather, the corporation was hoping that the technical superiority of octane 92 gasoline would attract A-class consumers who would not mind spending a few extra piastres in order to keep their LE250,000 vehicles in a good shape. Real market experience proved that EGPC was far too optimistic with regards to octane 92 gasoline, which has so far made less than 0.5 per cent sales since it became available in gas stations four months ago.
According to an energy expert who preferred to remain anonymous, EGPC's real aim was to gradually withdraw the regular, cheaper, subsidised benzene 90 from the market. By introducing a more expensive gasoline, in the hope that consumers get used to the new prices, EGPC could ensure that consumers would not be suddenly shocked by an increase in the price of one of the most indispensable commodities to Egyptians. "The scenario would go as follows: Benzene 90 would continue to be sold for LE1 per litre but it would not be available so consumers would be obliged to turn to the more expensive type of gasoline," he commented.
Others believe, however, that it was only natural that motorists were not enthusiastic to buy octane 92 gasoline because an important economic factor had been overlooked. "The new product is almost 40 per cent higher in price and yet has no tangible impact on the car or the engine," commented Ashraf Tawfiq, North Africa Cluster Retail Manager at ExxonMobil.
ExxonMobil, which has a 24 per cent share of the gasoline market in Egypt and at least 400 fuelling stations across the country, has introduced octane 92 gasoline in 20 of its gas stations in Cairo, Alexandria and the Northern Coast only in support of the policy adopted by the EGPC. To do so was costly. To make the new product available to the consumer, Tawfiq said, special tanks and pumps at the gas stations had to be provided. It was also necessary to provide special tank trucks to transport the product to where it would be finally sold.
"Instead of building new tanks, the already existing benzene 90 tanks were divided to contain both the regular and the super type of gasoline in an attempt to reduce expenses," said Tawfiq.
However, gasoline dealers still complain because of the high expense they have had to put up with compared to the miserable sales the new product is registering.
"It is a waste of the tank capacity because the new gasoline is not selling well, while tank trucks carrying the regular benzene have to come more frequently now, which adds to the financial burden. Moreover, the evaporation rate of the new type of gasoline is much higher than that of the regular benzene," said a dealer of a downtown gas station.
Although it is still too early to assess EGPC's experiment, namely, to produce a higher quality gasoline at a higher price, fully, it has opened the flood-gates of endless argument among energy experts and oil companies. It has also raised fears among consumers as to whether or not this was an initial step towards raising fuel prices across Egypt.
In Egypt, fuel is heavily subsidised by the government for social reasons. "An increase in fuel prices would automatically translate into an increase in the transportation fees of every commodity and prices would go beyond control," said an energy expert. According EGPC statistics, the government provides $2 billion in subsidies for oil products, including gasoline, solar and mazout.
It is no secret that oil-marketing companies in Egypt have been calling for increasing the price of fuel for quite some time now, doubtless for their own reasons.
"Since 1995, the profit margin has been stable while costs for building and operating new fuelling stations and of transportation has more than tripled," commented Tawfiq, who added that among the highest costs are governmental charges including electricity and water expenses and the fees and royalties paid to the City Council. Tawfiq underlined other factors that indicate that building new fuelling stations has economically become unfeasible.
According to Tawfiq, it takes at least a 2000- square-metre area, best situated in vital area in the city, to build a station. Most of the equipment used, including pumps and hoists, is imported and heavily charged and the costs of operation are very high. Meanwhile, the net profit on regular benzene for marketing companies as well as dealers is so marginal that it has almost become non-profitable to continue building a network of fuelling stations to service different areas. "It is no longer wise to pump very high investment in to get so meager a profit," commented Tawfiq, who indicated that ExxonMobil, for example, had to shut down 50 fuelling stations across the country within the past two years for reason of profitability.
Still worse is the negative impact these factors have had on foreign direct investment by multinational oil companies in Egypt.
"In the 1990s, Egypt had the biggest share of the capital investment of ExxonMobil with at least $24 million injected annually into the market. Nowadays, the capital has shrunk to $1.8 million, while the bulk of investment has been directed to more promising markets in Tunisia and Morocco," said Tawfiq


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