Fuel Subsidies

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Global Snapshot

Government control of the domestic prices of petroleum products is a common feature in developing countries.[1] However fuel subsidies cover a wide range of government actions that lower the cost of fossil fuels.[2] A report by the Organisation for Economic Co-operation and Development (OECD) in 2011 listed over 250 individual budgetary and taxation mechanisms for altering the price of fossil fuels,[3] and therefore estimating fuel subsidies can be difficult. The most commonly used methodology for quantifying fuel subsidies, known as the price-gap approach, calculates subsidies applied to fossil fuels that are consumed directly by end-users or consumed as inputs to electricity generation.[4] This approach compares an average price paid by the end-user with a reference price that corresponds to the full cost of supply.

According to Washington-based Center for Global Development, most oil exporters subsidise their fuel prices domestically, sometimes at very low prices and implying a large cost for governments.[5] The International Energy Agency (IEA) estimates that fossil-fuel subsidies amounted to US$ 409 billion worldwide in 2010, and they predict that subsidies could rise to US$ 660 billion by 2020, equating to 0.7 percent of global Gross Domestic Product (GDP).[6] Deutsche Bank said that in 2010, 70 percent of fuel subsidies were made in the world’s major oil and gas exporting nations, and that such subsidies have been instrumental in driving an increase in domestic demand within Organization of the Petroleum Exporting Countries (OPEC) countries and other oil-exporting countries in the 2000s.[7]

The table below illustrates the 15 countries that spent the most on fossil-fuel subsidies in absolute terms in 2010 (US$ billions), along with the relative value of such subsidies compared with their Gross Domestic Product (GDP).[8][9]


Country Total Fossil-Fuel Subsidies (US $ billions) Fossil-Fuel Subsidies as a share of GDP
Iran 80.8 22.6%
Saudi Arabia 43.5 9.8%
Russia 39.3 2.7%
India 22.3 1.4%
China 21.3 0.4%
Egypt 20.3 9.3%
Venezuela 19.9 6.9%
United Arab Emirates 18.2 6%
Indonesia 16.0 2.5%
Uzbekistan 12.0 30.5%
Iraq 11.4 13.8%
Algeria 10.6 6.6%
Mexico 9.5 0.9%
Thailand 8.4 2.7%
Ukraine 7.9 5.6%

Criticism

The International Energy Agency (IEA) said in a 2011 report that the normal rationale for fuel subsidies is that they promote economic development and alleviate poverty. However they argued that subsidies can have unintended consequences such as encouraging wasteful consumption, discouraging energy efficiency and reducing the competitiveness of renewable fuels. Crucially the IEA rejected the argument that fuel subsidies promote development, arguing that instead they foster inequality through disproportionately benefiting richer households who are more likely to own fuel-consuming cars and electrical appliances. Therefore the IEA concluded that fuel subsidies are an extremely inefficient means of assisting the poor, with only eight percent of the US$ 409 billion spent on fuel subsidies in 2010 reaching the poorest 20% of the global population.[10] G20 Leaders have also criticised fuel subsidies, agreeing in 2009 to "rationalise and phase out over the medium term inefficient fossil-fuel subsidies", with the leaders of the Asia-Pacific Economic Cooperation (APEC) making a similar commitment the same year.[11]

In March 2012 a United Nations Development Programme (UNDP) report put forward the case for eliminating fossil fuel subsidies, arguing that the savings made could be used to help the poorest citizens cope with rising world energy prices. On top of this, the report said that the move would address climate change, reduce energy waste, cut government expenditure and minimise social inequality. [12] Balazs Horvath, the report's lead author, pointed out that in Europe and Central Asia the elimination of fuel subsidies has been followed by both economic growth and a fall in greenhouse gas production, which "gives quite a bit of weight to the argument that this can work". Between 1990 and 2008 gross domestic product (GDP) expanded by 22 percent in the region whilst carbon emissions fell by 28 percent - the largest regional decline in the world.[13]

Elimination of subsidies

The elimination of fuel subsidies presents a political dilemma, due to the social unrest which can often result.[14]

For example the proposed removal of fuel and transport subsidies was one of the key motivations behind the violent "Caracazco" riots in the capital in 1989.[15] Furthermore, in the first quarter of 2012 alone, multiple protests and strikes were launched against the prospect of fuel subsidy cuts.

In January 2012 Nigeria experienced a wave of protests in response to the government decision to remove subsidies on imported oil products, forcing the government to partially re-instate the subsidies.[16] Ghanaian fuel prices increased by about 20 percent when their fuel subsidy was cut at the end of 2011, [17] cuasing civil society groups to talk of nationwide strikes[18][19] and forcing a policy reversal in February 2012.[20] In March 2012 the Indonesian government was forced to rule out a fuel subsidy cut after weeks of protests across the country. Indonesia officials were wary of the political consequences of fuel price hikes; in 1998 a fuel price rise in Indonesia helped trigger student riots that toppled the 32-year Suharto dictatorship.[21]

Fuel Subsidies by Country

Azerbaijan

Main article: Fuel Subsidies in Azerbaijan


Eastern Mediterranean

Main article: Fuel Subsidies in the Eastern Mediterranean

Egypt

Main article: Fuel Subsidies in Egypt

Ghana

Main article: Ghanaian Subsidy Policy

Iran

Main article: Iranian Subsidy Policy

Iraq

Main article: Fuel Subsidies in Iraq

Libya

Main article: Fuel Subsidies in Libya

Niger

Main article: Fuel Subsidies in Niger

References

  1. "The Magnitude and Distribution of Fuel Subsidies: Evidence from Bolivia, Ghana, Jordan, Mali, and Sri Lanka" IMF, 2006.
  2. "Fossil Fuel Subsidies" Price of Oil, retrieved 19 April 2012.
  3. "Inventory of estimated budgetary support and tax expenditures for fossil fuels" OECD, 2011.
  4. "Fossil-fuel subsidies – methodology and assumptions" International Energy Agency, retrieved 19 April 2012.
  5. "Nigerians Demand Cheap Gas, But Fuel Subsidies Are NOT Pro-Poor" Center for Global Development, 6 January 2012.
  6. "World Energy Outlook 2011" International Energy Agency, 2011.
  7. "Crude Oil: Iceberg Glimpsed Off West Africa" Deutsche Bank, 2 February 2012.
  8. "Fossil fuel subsidies: a tour of the data" The Guardian, retrieved 19 April 2012.
  9. "Fossil-Fuel consumption subsidy rate as a proportion of the full cost of supply, 2010" International Energy Agency, 2012.
  10. "World Energy Outlook 2011" International Energy Agency, 2011.
  11. "Inventory of estimated budgetary support and tax expenditures for fossil fuels" OECD, 2011.
  12. "From Transition to Transformation" United Nations Development Programme, retrieved 18 April 2012.
  13. "Cutting fuel subsidies key to sustainable development - report" Alert Net, 13 April 2012.
  14. "Removal of Fuel Subsidies in Nigeria: An Economic Necessity and a Political Dilemma" Brookings Institute, 10 January 2012.
  15. "Caracazo Was “Forerunner” to Anti-Neoliberalism Protests, States Venezuela's Chávez" Venezuela Analysis, 6 October 2011.
  16. "Crude Oil: Iceberg Glimpsed Off West Africa" Deutsche Bank, retrieved 19 April 2012.
  17. "How Ghana, Tanzania, Uganda tackle fuel subsidy" BusinessDay, 18 January 2012.
  18. "Ghana Reinstates Fuel Subsidy But Higher Transport Fares Remain" SaharaReporters.com, 8 February 2012.
  19. "Protests, strikes may erupt in Ghana over removal of fuel subsidy" Punch, 19 January 2012.
  20. "Ghana: mixing politics and fuel prices" Financial Times, 9 February 2012.
  21. "Emerging Asia struggles to cut soaring fuel subsidies" Financial Tribune, 1 April 2012.