May 13, 2011

Fossil Fuel Subsidies Worldwide

We saw earlier how Iran had instituted a dramatic reform of its energy pricing, allowing gasoline prices to rise to market levels while putting cash equivalent to previous energy subsidies in the bank accounts of heads of households. This chart suggests how far they had to come; it is a sensible reform, but it reforms a badly misguided prior policy.

This piece from the FT argues that price increases over the last two years have "more than cancelled out" the effects of these subsidy reforms:
Governments spent $342bn on holding down the prices of petrol and domestic fuel in 2009 – six times more than the $57bn they devoted to subsidising renewable energy.
Several developing countries, notably India, Malaysia and Iran, made painful efforts to reform national subsidy regimes with the aim of reducing their cost in 2010.

But Fatih Birol, chief economist of the IEA, told the Financial Times that rising oil prices had more than cancelled out their efforts. The cost of a barrel of oil averaged $80 last year, compared with $61 in 2009, rendering it more expensive to hold down retail prices for consumers. 
“Despite these efforts, the subsidies in 2010 are significantly higher than they were in 2009,” said Mr Birol. The final figures for the total cost of subsidies last year will become available in November. . . .  
The Middle East’s main oil producers, notably Saudi Arabia, are among the biggest spenders on fuel subsidies. With governments across the region threatened by social unrest, they are even less willing to court unpopularity by reducing this burden.

But the IEA calculates that some $60bn must be invested in global oil production capacity every year, mainly in the Middle East and north Africa, in order to satisfy global demand. Political instability may deter international companies from investing in this region, while the cost of subsidies may also crowd out domestic capital.

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