On my maiden trip to Saudi Arabia, in late 2014, I received a crash course on unsustainable Saudi economics within minutes of landing, when my driver pulled into a gas station just outside Jeddah airport. We were in a big BMW 7 Series sedan and the fill-up—about 60 litres—cost the equivalent of about $8 (all currency in U.S. dollars). I was astonished. For Saudis, gasoline is much cheaper than bottled water.
Of course, Saudi Arabia still sits on some of the world's biggest proven oil reserves and its production costs are extremely low. But that doesn't explain the giveaway prices. Government subsidies do: They are lavish, and obscenely so.
Saudi Arabia and dozens of other countries, many of them poor and running hefty budget deficits, seem bent on bankrupting themselves so that consumers can buy gasoline, diesel, propane and other fuels for the price of a pack of cigarettes or less. Venezuela is hurtling toward insolvency because oil, its main export, trades about 40% below its mid-2014 price. Yet it is still the champion subsidizer. According to the Financial Times, one U.S. dollar—at black market exchange rates—will buy more than 1,000 litres of gas. The notion of conserving fuel is absurd—the hybrid Toyota Prius is not a big seller in Venezuela. The government spends about $12 billion a year on gasoline subsidies.
There is nothing commendable about fuel subsidies, unless you are a vote-buying politician. Subsidies encourage wasteful consumption, boost the output of pollutants and drain national treasuries.
True, subsidies are often put in place to ease the burden on the poor, but the wealthy benefit far more. That's because they are the biggest users of energy. An International Monetary Fund report notes that in Sudan (before it split into two countries), the poorest 20% of the population used up just 3% of the fuel subsidies while the richest 20% sucked in more than 50%.
If there is one global economic move that would—unambiguously—help clean up the environment, repair national finances and put the "market" back into energy markets, the removal of fuel subsidies is it. The International Energy Agency (IEA) says the global cost of fossil-fuel subsidies in 2013 was $550 billion, more than four times the incentives provided for renewable energy. That's about the same as the GDP of Sweden or Poland.
It's a worthy idea, but fuel subsidies—like all subsidies—are exceedingly difficult to eliminate. Some governments are chipping away at them, but the pace could be much faster given the recent plunge in oil prices. When prices are low, subsidies should lose their urgency and easing them out would not necessarily trigger fuel riots. Yet the memory of riots haunts almost every politician in the developing world. Twenty-five years ago, deadly protests erupted in Venezuela when the price of fuel was suddenly jacked up. Hugo Chávez exploited the unrest to ease his way into the presidency.
Fuel subsidies have been around almost forever and soared during the expensive-oil era—the IEA says they rose 60% between 2007 and 2013. Egypt now spends about 14% of its GDP on fuel and food subsidies. The IMF says that total energy subsidies exceed 4% of GDP in Mozambique, Zambia and Zimbabwe. In the Middle East and North Africa, the total comes to more than 8%. Energy subsidies in Iran, Venezuela, Saudi Arabia, Ecuador and Algeria exceed public spending on education. Sitting behind the wheel of an SUV is apparently a more laudable national goal than sitting behind a school desk.
The institutions dominated by the rich world—the IEA, the IMF and the OECD among them—have been banging away about the evils of subsidies since oil prices plunged. India, Morocco, Ghana and a few other countries have made good progress in subsidy reduction. A few of them have eased the burden on the poor by coupling the subsidy removal with anti-poverty programs. But many other countries have made only timid attempts, or none at all.
Yet the hypocrisy of the rich world is also stunning. Wealthy developed countries don't directly subsidize fuel at the pump, but they spend fortunes in taxpayers' money to sweeten the life of the oil and gas companies. Governments of the G20 countries—which includes Canada—spend about $88 billion a year subsidizing oil and gas exploration, Britain's Overseas Development Institute estimates.
Low world oil prices have fossil fuel companies clamouring for even more breaks, and leaders of rich countries are responding. Vladimir Putin is propping up Russian oil giant Rosneft. Britain has slathered tax cuts on the North Sea producers, who had threatened to cut jobs and shelve projects unless their fiscal treatment became more generous. The lobbying might of U.S. shale oil producers and oil sands players in Canada will no doubt ensure similar support—just give it time. Subsidies are apparently bad for some people, but not others.
Eric Reguly