Posted by Daniel Hall on July 28, 2008
There is a good article in today’s New York Times that discusses fuel subsidies, particularly in Asia:
From Mexico to India to China, governments fearful of inflation and street protests are heavily subsidizing energy prices, particularly for diesel fuel. But the subsidies — estimated at $40 billion this year in China alone — are also removing much of the incentive to conserve fuel. …
China raised gasoline and diesel prices on June 21, though still keeping them below world levels. World oil prices plunged more than $4 a barrel within minutes on the expectation that Chinese demand would slow.
In Indonesia, the government spends six times as much on energy subsidies as it does on agricultural investments, even as rice prices have skyrocketed this year.
Many countries, like India, have raised oil prices considerably in recent months, only to watch world prices climb even further, pushing up the cost of subsidies once again. China’s estimated $40 billion in subsidies this year is up from $22 billion last year, mainly for this reason, although consumption has also risen, with Chinese buying 18 percent more cars in the first half of this year than in the period a year earlier.
A few comments:
1. It is reasonable to wonder how long many of these countries can afford these policies if oil prices stay around current levels. (“Before adjusting the prices, Malaysia was spending 7.5 percent of its entire economic output on fuel subsidies, a greater share than any other nation. Indonesia follows with 4 percent.”)
2. The $40 billion figure for China is eye-popping, but it is not entirely clear what fuels it is for and how it was calculated. The IEA has estimated that in 2005 China subsidized oil products to the tune of around $7 billion, out of $25 billion in total energy subsidies. My understanding is that the 2008 World Energy Outlook is going to take another look at developing country energy subsidies. I wait with curiosity.
3. As Free Exchange notes, a lot of the increase in oil consumption in China is being driven by increases in wealth and consumption more broadly. Market prices won’t stop demand in China from growing but they might help prevent China from developing into an oil-addicted behemoth (see America, 1950s).
4. The EIA estimates that the U.S. currently subsidizes energy at around $16.6 billion, with about half of this going to renewables (particularly biofuels), nuclear power, conservation, and energy R&D. About $2 billion goes to oil and natural gas, almost all in the form of tax expenditures. On a per-unit basis energy is neither much subsidized nor taxed in the U.S.