Low Energy Prices Offer Opening for Subsidy Cuts

Across the Middle East and much of the developing world, government subsidies make energy cheap and encourage consumption.  But governments around the world are beginning to take advantage of plummeting oil and natural gas prices by slashing the subsidies. The cuts are just a small fraction of the global total of annual subsidies, but energy experts say they are beginning to add up.
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Many of the big producers have no choice but to raise domestic energy prices,” said Jim Krane, a Middle East energy expert at Rice University.  “This includes prices on fuel, but also electricity and water, since most water in the region is desalinated by burning fossil fuels.  Now, with less revenue coming in, the oil-exporting regimes have a stronger fiscal incentive to do this.”

Such subsidies amount to more than $540 billion a year worldwide, and for decades they have been used as a crutch by governments to buy political support and lend a crude, but flawed, safety net to the poor, energy experts say.  But they are also a drag on economic development and cause environmental damage by encouraging the burning of fossil fuels and discouraging efficiency, the experts say.
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The United States, like most developed countries, does not subsidize the consumption of energy or put price controls on fossil fuels, although environmentalists point out that oil companies receive tax breaks for exploration.  A debate has begun about whether to raise gasoline taxes now to repair roads and bridges, as well as to damp demand for cheap fuel.debate has begun about whether to raise gasoline taxes now to repair roads and bridges, as well as to damp demand for cheap fuel.
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Rising consumption of oil in the Middle East and in the developing world has tightened global supplies by several million barrels a day, energy experts say, helping to raise crude prices over the last decade.

For years, the International Monetary Fund and the World Bank have been urging Middle East producers and developing countries alike to cut subsidies.  In a report in October, the I.M.F. reported that subsidies distort prices and foster over consumption.
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“Overconsumption leads to adverse impacts on traffic congestion, health, and the environment,” the I.M.F. paper said.  “Subsidies also discourage investment in the energy sector, and encourage smuggling and black market activity, which can lead to shortages of subsidized products.”
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At an energy conference in Abu Dhabi in December, Maria van der Hoeven, executive director of the Paris-based International Energy Agency, urged regional oil ministers to seize the moment of low energy prices to reduce subsidies.

“There is no time for action like the present,” she was quoted as saying by the Middle East Petroleum and Economic Publications, which is based in Cyprus.  “It’s an opportunity to put a price on carbon and slash fossil fuel subsidies.”

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