International energy subsidies in the early 1990s were anywhere from $235 billion USD to $350 billion USD a year, according to the World Bank. Since then they have only continued to grow, eating up government budgets and causing a disruption of free market forces. However, that was an era of cheap oil energy. That era is over.
Fuel subsidies are common practise in many countries around the world as governments seek to ease the pain of higher fuel and energy costs. Goldman Sachs estimates that about half of the world’s populations currently benefits from some sort of fuel subsidy. But by distorting fuel prices, fuel subsidies encourage fuel consumption and discourage the development and use of new alternative energy sources. As long as oil-derived energy is cheap, there is no incentive for other more costly forms of energy. The International Herald Tribune has an article today on the hidden costs of fuel subsidies.
Buckling under the weight of record oil prices, several Asian countries have cut or are thinking of cutting their fuel subsidies, which raises a pressing question for Beijing: Can China afford its own oil subsidies at a time when it is spending billions on post-earthquake reconstruction?
The short answer is yes, because China is blessed with both large trade account and fiscal surpluses. The reconstruction cost is projected to amount to about 1 percent of China’s gross domestic product, while the fuel subsidies account for another 1 percent, JPMorgan estimates.
So for China, the answer is yes. Blessed with both large trade and fiscal surpluses, China can afford to keep its economy humming and continue to invest in alternative energy development. Other countries, especially in Asia, are not quite so lucky and are facing increased budget deficits and slower economic growth. They are in a quandary. Many have large urban poor populations that depend on fuel subsidies for transportation to work and for cooking oil (kerosene) to live. Yet these governments depend on international financial markets for credit that frown upon government deficit spending.
Hong Kong, Singapore and South Korea, most Asian nations subsidize domestic fuel prices. The more countries subsidize them, the less likely high oil prices will have any affect in reducing overall demand, forcing governments in weaker financial situations to surrender first and stop their subsidies. That is what happened over the past two weeks. Indonesia, Taiwan, Sri Lanka, Bangladesh, India and Malaysia have either raised regulated fuel prices or pledged that they will.Indonesia has convinced its people that fuel subsidies benefit the rich more than the poor, because rich people drive more and consume more electricity. Jakarta rolled out a $1.5 billion cash subsidy program to help low-income Indonesians cope with higher prices. Although no country wants to build a system on subsidies, the cash subsidy at least makes fuel subsidy cuts politically feasible.
Here’s a global review of fuel subsidies currently in place:
Venezuela
By subsidizing gasoline, Chávez spreads the oil wealth. But the cost of those cheap fill-ups is becoming hard to ignore. Global oil prices zoomed up to $135 a barrel this past week. But that doesn’t worry Roberto Morales, a 33-year-old Venezuelan businessman. Morales, who drives a compact Volkswagen Gol, still pays only $1.32 to fill up his car with 11 gallons of high-octane gasoline, thanks to Venezuela’s subsidized fuel price. More on Venezuela’s fuel subsidies from a Business Week article entitled Venezuela: The Land of 12-Cent Gasoline. Of course, Venezuela is major oil producer and can keep these subsidies going but are they wise at this steep a rate?
Chile
Chile is a net oil importer and a small oil producer. It’s a mid-tier economy that has grown rapidly in the last 18 years. This past week, the government of President Bachelet announced a $1 billion USD fuel subsidy programme. The story from Reuters. The programme was not well-received. The next day, thousands of Chilean drivers parked their trucks along national highways to protest soaring fuel prices in a tacit rejection of government fuel subsidies announced amid fanfare.
Indonesia
Presently Indonesia spends billions of dollars subsidizing and importing oil. Indonesia, which is spending 15%-20% of its budget on fuel subsidies, has signaled a 30 percent rise in fuel prices. It spends almost 30% of its budget on fuel and food subsidies, more than on development, producing a government deficit which has led to a downgrade of its credit rating. In January 2008, Indonesia announced that bio-fuels will make up 10 percent of Indonesia’s fuel transport consumption by 2010. The initiative could ease the economic impact of fuel subsidies — currently some of the highest in the world — in Indonesia, while boosting demand for locally produced bio-energy crops including palm oil, jatropha, sugar cane and cassava.
“We can’t increase prices of subsidized fuel as it will hurt consumers. But we may be able to cut consumption and replace it with bio-fuel,” Reuters quoted Evita Legowo, secretary at the National Bio-fuel Development Team, as saying at the Reuters Global Agriculture and Biofuel Summit.
On May 23, 2008, Indonesia raised fuel prices as the government cuts fuel subsidies despite concerns about possible social unrest.
The government “decided to increase prices of subsidized fuel starting midnight,” the energy minister, Purnomo Yusgiantoro, told reporters.
Fuel prices are set to rise on average by 28.7%, with the price of gasoline increasing by a third to 6,000 rupiah, or 65 U.S. cents, a liter.
India
India’s government subsidizes kerosene and liquefied petroleum gas (LPG) directly. It keeps other fuels, such as diesel, artificially cheap by the simple expedient of stopping state oil companies from raising their prices. These firms keep themselves afloat with “oil bonds”, which the government guarantees but does not enter on its books. In October 2007, for example, the government announced it would issue bonds worth 235 billion rupees this fiscal year, which will compensate oil-market companies for about 43% of their losses. All told, India’s fuel subsidies might cost as much as $17.5 billion this year, according to Lombard Street Research, a British firm of economists. That amounts to as much as 2% of the country’s GDP. The subsidy of kerosene is vital for India as the majority of India’s one billion people use kerosene to cook their daily meals.
On June 4th, 2008, India succumbed to the inevitable:
With inflation soaring, the Indian government Wednesday announced the highest ever increase in retail fuel prices, triggering bitter political criticism and angry street protests.
After weeks of nervous caution, the petroleum minister said at a news conference that gasoline prices would rise by the equivalent of 55 cents per gallon, about 11 percent, and diesel by 32 cents, almost 10 percent, effective at midnight. The price of cooking gas cylinders is to rise by a little over a dollar, or about 16 percent. Fuel has traditionally been heavily subsidized by the government, which regulates prices to ease the impact on India’s millions of poor.
In a televised address, Prime Minister Manmohan Singh said that the decision was inevitable and that Indians must “learn to adjust” to international economic conditions.
More from the Washington Post.
Bangladesh
Subsidies cost Bangladesh annually about $730 million. The subsidy amount is expected to increase to $1.5 billion if fuel prices are not hiked.
Malaysia
Malaysia remains a small net exporter of oil. That won’t last much longer. Cheap fuel has helped the inefficient Malay car industry but it is a curious priority for a middle income country with pollution problems and abysmal public transport in its Kuala Lumpur/Klang Valley region. De facto Finance Minister Nur Mohamed Yacob said earlier this year that the subsidy system must be changed but getting away from the addiction to cheap oil in a country which has very high car ownership relative to income levels will be politically difficult, particularly in the wake of the recent election and turmoil in the ruling party.
On June 4, 2008, the Malaysian government captitulated. The half of Kuala Lumpur’s budget that was going to energy support is no longer sustainable and so it cut its fuel subsidies:
Driven by skyrocketing fuel prices that the government can no longer afford, Malaysia Wednesday dared the possibility of further political trouble for the ruling national coalition at best and civil unrest at worst and slashed hefty fuel subsidies that would have cost RM56 billion this year, about half of the government’s revenue.
The government announced Wednesday evening that petrol prices would rise by 78 sen (US24¢) at midnight — a 41 percent jump from RM1.92 per liter to RM2.70. That means those spending RM2,000 per month to fill the tanks of their BMWs will now be paying RM2,820. Regardless of income levels, it is likely most Malaysians will feel the pinch.
The full story from the Asia Sentinel.
The United States
The United States does not directly subsidize fuel prices. Far worse, it subsidizes energy companies. It serves reminding the readership the Senator Barack Obama voted for the Bush-Cheney Energy Plan. Here are the gorey details:
OIL & GAS SUBSIDIES: $6 BILLION
Section 1329
Allows “geological and geophysical” costs associated with oil exploration to be written off faster than present law, costing taxpayers over $1.266 billion from 2007-2015. The provision claims to raise $292 million from 2005-06, and cost taxpayers $1.266 billion from 2007-2015. It originated in the House (there was no such provision in the original Senate bill). Record-high oil prices should provide a sufficient incentive for oil companies like ExxonMobil to drill for more oil without this huge new tax break.Section 1323
Allows owners of oil refineries to expense 50% of the costs of equipment used to increase the refinery’s capacity by at least 5%, costing taxpayers $842 million from 2006-11 (the estimate claims the provision will actually raise $436 million from 2012-15). This provision was added by the Senate. Record high prices for oil and gasoline, and record profits by refiners like ExxonMobil and Valero should provide all the incentive needed to expand refinery capacity without this huge tax break.Sections 1325-6
This tax break allows natural gas companies to save $1.035 billion by depreciating their property at a much faster rate. This tax break makes no economic sense, as natural gas prices remain at record high levels, and these high prices—not tax breaks—should be all the incentive the industry needs to invest in gathering and distribution lines.Section 342
Allows oil companies drilling on public land to pay taxpayers in oil rather than in cash.Sections 344-345
Waives royalty payments for drilling for some natural gas in the Gulf of Mexico.Section 346
Waives royalty payments for drilling in offshore Alaska.Sections 353-4
Waives royalty payments for gas hydrate extraction on the Outer Continental Shelf and public land in Alaska.Section 383
Allows oil companies drilling in federal land off the coast of a particular state to pay the state 44 cents of every dollar it would have paid to the federal government for the privilege of drilling on federal land.The royalty-in-kind provisions in this section allow corporations drilling for oil on public land to forgo paying cash royalties to taxpayers. Instead, companies provide an amount of the oil as an in-kind contribution to the federal government. Since federal land supplies one-third of the oil and gas produced in the United States, expansion of this program could have a significant impact on the federal treasury.
Mexico
Mexico has extended a $19 billion fuel subsidy to mitigate the effects of rising oil prices, four times more than 2007. It subsidizes prices by paying Pemex, a state monopoly, the difference between pump prices and what Pemex pays for imports.
Egypt
Egyptian energy subsidies stand at 60 billion Egyptian pounds ($11.21 billion), up from 57 billion in 2007. Of the total, 20 billion Egyptian pounds $3.5 billion) a year was extended as gas subsidies to energy-intensive companies, which the government plans to phase out.
Thailand
Thailand has decided to extend subsidies by lowering fuel prices. The country’s four state-run refineries will supply 122 million liters of diesel per month to bus operators at a discount of 3 baht (9.4 cents). This followed a one-day strike by operators and marked an about-face by Thailand, which has resisted resorting to wider fuel subsidies since scrapping them in 2005. With the Thai goverment embroiled in yet another political crisis at the moment, it is unlikely to muster the political will to cut fuel subsidies. It might prove the coup de grace for the embattled Thai government.
Syria
In April 2008, the Syrian government introduced rationing for the heating oil it makes available at subsidized prices. The move has been met by some criticism, but comes in the face of the rising cost of oil imports, and smuggling which is siphoning off much of the cut-price kerosene to other countries.
The scheme represents the first stage of a plan by the ministry of economy and trade to phase out subsidies for all petroleum products in the next five years.
Syrians are now lining up to collect the vouchers that will entitle each family to 1,000 litres of subsidized kerosene for the year. The government plans to distribute vouchers to 5.1 million families by April 26.
The government says 1,000 litres of heating oil should be enough to get people through even a cold winter. Oil minister Sufian al-Alaw said in a statement that 77 percent of families use less than that amount in the course of a year.
A litre of kerosene currently costs about 7.20 lira, about 14 US cents. The government has not yet announced what the fuel will cost under the new scheme.
Male heads of household, widows with children, and the oldest sons in orphaned families are allowed to claim vouchers, and there has been a storm of criticism from women’s rights activists who questioned why divorced, unmarried or widowed women living alone should be excluded.
“That is blatantly discriminatory against women, and it’s an irresponsible decision,” said one women’s activist. University students, too, are complaining that they are not entitled to any subsidized fuel even if they live far from the family home. In the rural Al-Tal area outside Damascus, one resident said people there needed more heating oil than the average.
“The weather is very cold,” he said. “We definitely use more kerosene than people who live in the city of Damascus.”