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Fuel subsidies to double in 2008

By Paul Hodges on 03-Jun-2008

Fuel subsidies are set to double this year to at least $100bn, according to the head of the International Energy Agency (IEA), Nobuo Tanaka. This is in spite of the fact that some countries such as Taiwan have recently abolished subsidies, whilst others such as Indonesia have reduced them significantly. But for every subsidy withdrawn, a new one seems to appear. Yesterday Chile, which imports almost all its oil, announced that it would start to subsidise. Equally, some Western governments are toying with the idea of reducing existing fuel taxes. This has already become an issue in the US Presidential campaign, as well as in many European countries. And of course, it amounts to the same thing as an outright subsidy, as it means today’s higher prices are not being passed on.

The problem is one of ‘chicken and egg’. Once some governments start to subsidise, prices get out of line with costs. So demand increases. In turn, with supply tight, world market prices increase for everyone else, and so the pressure for more or new subsidies increases. The ironic thing is that energy subsidies themselves, whether direct or indirect, benefit the rich and not the poor. The International Monetary Fund has recently calculated that the top 20% of households receive 42% of a country’s total subsidy. This is because wealthy people consume more energy. The poorest people only receive 10% of the benefit.

Subsidies are therefore a very wasteful use of resources. But I doubt that will stop governments from using them. And energy-intensive industries such as chemicals will end up paying the bill.