the cost of oil subsidies

Editorial
The Cost of Oil Subsidies

Developing countries are growing faster than rich nations. Government subsidies are exacerbating their unquenchable thirst for oil to shield the poor from high energy prices, where eliminating subsidies might lead to inflation. | NYtimes

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It is not too surprising that oil prices have retreated from the lofty highs of more than $140 a barrel reached in July. Energy consumption is falling across the industrial world. Americans, the world’s most avid gas guzzlers, finally responded to higher prices. They drove about 10 billion miles less in May than they did in the same month last year. They are trading in their S.U.V.’s for more sensible vehicles. As oil prices rose by two-thirds, American oil consumption fell by 900,000 barrels a day between the first quarter of 2007 and the same period of 2008.

Unfortunately, a large share of the world’s population is not responding to high energy prices. Across the developing world, governments are subsidizing energy, blunting the incentive to conserve by keeping prices low. They are absorbing the savings made by industrial countries and helping to raise oil prices by stoking demand.

In China, demand rose by 400,000 barrels a day between the first quarter of 2007 and the same period of 2008. Demand in the industrialized nations in the Organization for Economic Cooperation and Development fell by one million barrels a day over the same period. In the rest of the world, it grew by 1.1 million barrels.

Developing countries are growing faster than rich nations, of course. But experts say that government subsidies are exacerbating their unquenchable thirst for oil. Keith Bradsher reported in The Times that China is expected to spend about $40 billion this year in subsidies. Venezuela and Egypt are forecast to spend more than 5 percent of their total economic output on subsidies this year. Indonesia is predicted to spend almost as much, the International Monetary Fund estimates.

In all, the I.M.F. says that 48 countries are shielding consumers from high energy prices with subsidies. As a result, while demand for oil in the rich world is expected to fall about 1 percent this year, consumption in emerging and developing countries is forecast to rise 3 percent, according to estimates by I.M.F. economists.

Governments in developing countries say they must shield the poor from high energy prices. They worry that eliminating subsidies might lead to inflation at a time when prices are rising broadly. But these subsidies are misguided and mainly benefit the well-off, who own big cars and fly in jets, as well as energy-intensive industries, which are not usually those that create most jobs.

They are expensive, sucking in public money that might be better used on, say, health care or education. And they get costlier as the price of oil rises, which explains why some countries, including China and India, have allowed domestic energy prices to rise somewhat.

Subsidies are a big factor keeping world oil prices high. Outside of the Middle East and some parts of Texas, this is in nobody’s interest.

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