Low Energy Prices Offer Opening for Subsidy Cuts

Source: By CLIFFORD KRAUSS, New York Times • Posted: Wednesday, February 4, 2015

Indonesians waiting to fill their scooters with subsidized fuel last November. The country has quit subsidizing gasoline. CreditDedi Sahputra/European Pressphoto Agency 

In Saudi Arabia, drivers pay roughly 45 cents a gallon to fill up their cars, and in Venezuela even less. Energy is so inexpensive in Kuwait and Qatar that residents chill their enormous swimming pools in the summer and typically leave their air-conditioners on at full blast while they are away on vacation.

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.

Even with oil rebounding in recent days — including a 6 percent rise on Tuesday for the global Brent crude benchmark — the price is down nearly 50 percent from its peak last year of just over $110 a barrel.

On Jan. 1, the Indonesian government abandoned a four-decade-old policy of subsidizing gasoline, permitting prices at the pump to rise and fall with global oil prices. As long as oil is cheap, Indonesians will not see much of a difference. Since October, India has stopped subsidizing diesel and raised fuel taxes. Malaysia cut subsidies on gasoline and diesel late last year.

Angola, a major African producer, raised gasoline and diesel prices 20 percent in December. Ghana has also acted to remove subsidies, and Nigeria is expected to follow suit after its national elections in February. Iran cut gasoline subsidies early last year.

“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.

Now, with political tensions high in North Africa and the Middle East, Kuwait, Oman and Abu Dhabi have all begun to reduce subsidies on power, diesel and natural gas in recent months. Kuwait has been notably aggressive because of a fiscal squeeze, and it has plans to triple the price of kerosene and diesel early this year. (Subsidies on gasoline and electricity, though, will remain untouched for now.)

At the same time, Egypt, which began cutting energy subsidies last spring even before oil prices began their 50 percent decline, is quickening the pace of its energy reform.

For countries like India, Egypt and Indonesia, which import sizable amounts of oil, governments hope not only to save money on subsidies but also to curb energy use to improve their balances of trade. For producing countries like Oman and Kuwait, lower subsidies save their governments money when they are earning much less from their exports. For both producer and consumer countries, government funds that finance subsidies could instead go to social programs and other investments.

“We know from studies in Mexico, Africa and Asia that these subsidies do not end up in the hands of the poorest people,” said Amy Myers Jaffe, an energy expert at the University of California, Davis. “They put a strain on federal budgets that are needed to help the poor, and they end up helping the wealthiest and middle class in these societies more.”

Sultan Ahmed al-Jaber, United Arab Emirates minister of state and chairman of Masdar, a company specializing in clean-energy technology, told officials at a regional energy conference in January that money saved from reduced subsidies is “money that can otherwise be redirected to improve energy systems and transform economies by creating jobs, stimulating economic growth and educating future generations.”

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.

With oil prices halved, cutting subsidies is half as expensive for the governments at a time when they are under financial stress. Saudi Arabia, for example, now consumes about a quarter of its production of oil domestically compared with only 3 percent in the 1970s, because of a growing and more prosperous population and dependence on burning oil for electrical power. At the same time, subsidized consumption has meant lower revenues for national oil companies across the region, impeding exploration and technological advancement.

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 overconsumption.

“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.”

Since 2011, there has been slow reform in the Middle East and Africa, with Jordan, Egypt, Morocco, Sudan, Mauritania, Tunisia and Yemen raising some energy prices. But turbulence in the region has slowed change. Saudi Arabia, Russia and Venezuela — three of the most heavily subsidized countries — have done little or nothing to reform.

That is because cutting subsidies often leads to a political backlash, energy experts say, and they have already emboldened the opposition in Kuwait. Cuts in energy subsidies helped produce serious political turbulence in Venezuela in 1993 and Indonesia in 1998, and more recently in Nigeria, Jordan and Ecuador.

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.”