And While We're on the Subject of Oil Subsidies…

Robert Farago
by Robert Farago

Our previous blog post made the connection between China's increasing demand for imported oil, The People's Republic's subsidies for the black gold ($40b p.a.) and the policy's inflationary effect on U.S. gas prices. Common sense (and The New York Times) suggest that other "managed economies" are using the same pro-growth strategy, amplifying the inflationary effect on world oil prices. "The oil company BP, known for thorough statistical analysis of energy markets [excellent hat tip to Big Oil!], estimates that countries with subsidies accounted for 96 percent of the world’s increase in oil use last year — growth that has helped drive prices to record levels." Hey, what happened to "Let's all blame the evil speculators?" Anyway, you think the U.S. is "addicted to oil?" Malaysia spent 7.5 percent of its economic output on oil subsidies. Indonesia shelled-out $20b this year to keep prices down. And where there's no political will to let the free market do its thing, there's no way they'll stop. "You talk about subsidies, you’re not only talking about the economy," asserts Purnomo Yusgiantoro, Indonesia’s minister of energy and mineral resources. "You’re talking about politics.” I.e. his job. So they're damned if they do, damned if they don't. And for this you pay at the pump. [thanks to OldDavid for the link]

Robert Farago
Robert Farago

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  • Pch101 Pch101 on Jul 28, 2008
    At some point, wouldn’t spending increasing percentages of these developing nations’ budgets on fuel subsidies become economically unsustainable for them? The oil importers such as China would, because they are buying the oil on the world market at the current (inflated) price. The Chinese recently increased fuel prices by 18%, so the process is underway. It's not clear that the oil producers would do this, though. They have political motivations to keep their citizens happy with low fuel prices. Occasionally, you get the irrational actor such as Chavez, who is plundering his oil industry to feed his social programs, while simultaneously diverting oil production that could be sold at high prices to cheap domestic use. I think that someone like him will need to leave office before Venezuela's behavior becomes more rational.
  • Mdf Mdf on Jul 28, 2008

    ZoomZoom said: I keep hearing “wean ourselves off of gasoline and diesel”, but nobody has suggested a viable alternative fuel and feedstock for these things: [...] From: We see your entire list amounts to almost nothing compared to the oil consumed by passenger vehicles. Solve that 41% problem and you effectively have no more problem. If you still have a problem, move on to trucking (12%).

  • Anonymous Anonymous on Jul 28, 2008
    Alex Rodriguez : July 28th, 2008 at 9:32 am Most of the demand growth went to countries who are subsidizing? THAT explains the 500% inflation rate in oil!!! [/sarcasm] For a basic necessity to current industrial economy with no practical substitutes at this time, it makes sense. If rising prices don't curb third world nations from developing their own oil based economy (and becoming second world nations I guess), then demand will continue to increase despite the cost of oil.
  • Anonymous Anonymous on Jul 28, 2008

    If you've been watching the news, you can see what happens when these countries reduce oil subsidies, people riot/protest. And, to answer a previous poster: what makes you think that the citizens of these countries can see that they are indirectly paying for the oil through increased government spending that at least eventually comes from their pocket? Most US citizens can't seem to figure this out judging by who runs this country-we did vote for our leaders afterall. Politicians get elected based on what they promise to do for their constituents, and the people who vote for them can't seem to figure out they will have to pay for these programs through either direct taxation or indirect taxation (inflationary borrowing and spending).