The day after markets registered the highest single-day rise in crude oil prices ever, the United States and Asia’s four largest economies (Japan, China, India and South Korea), meeting in Aomori, Japan in advance of the G8 Energy Ministers summit, have formed a sort of Petro-holics non-Anonymous club, calling for an end to oil subsidies in their countries.
Consumer subsidies (subsidized fuel prices), that is, not producer subsidies.
OK, what they actually agreed upon was “the need” to remove fuel-price subsidies. Eventually.
According to a report by Agence France-Presse, the five nations announced in a joint statement:
“We recognize that, moving forward, phased and gradual withdrawal of price subsidies for conventional energies is desirable. Undistorted and market-based energy pricing” would help “enhance energy efficiency and increase investment in alternative sources of energy.” They said that subsidies “should be replaced wherever possible by better targeted policies for intended beneficiaries. Such a move “could also lead to reduction in the government cost and greater integration of the domestic and global energy economies."
India and China signaled they were in no rush, however. Indeed, India’s ambassador to Japan, Hemant Krishan Singh, went so far as to say that it was not “accurate or correct” to describe the statement as an agreement to remove subsidies now. “This matter was raised in the meeting and responses and comments were exchanged. But no, there was no agreement to remove subsidies,” he said.
Zhang Guobao, vice chairman of China’s National Development and Reform Commission, also would not commit to any time frame for reducing his country’s subsidies.
Despite the wiggle-room in the negotiated statement, the very fact that big oil-consuming countries are starting to talk about such a taboo subject as oil subsidies is good news. Many developing economies heavily subsidize the price of petroleum fuels, ostensibly to ease the burden on the poorest members of society. Various studies have showed that, in fact, it is often the higher-income groups and middle classes that reap the biggest benefits from such subsidies. With crude-oil prices soaring, however, many of those countries — especially the net petroleum importers — are finding that they simply do not have the financial resources to keep resisting the market.
Several large countries, including India, Indonesia and Malaysia have recently been forced to raise their fuel prices, triggering large anti-government demonstrations in the first two countries. As Akira Amari, Japan’s energy minister and host of the talks, acknowledged, removing subsidies can be “a painful decision.”
More-developed countries, like the United States and Japan (which imports nearly all of its oil), and the major multilateral lending institutions, like the IMF and the World Bank, have been trying to convince developing countries to reduce and eventually eliminate general fuel-price subsidies for many years. The implication is that developed countries do not subsidize the consumption of petroleum products.
None that I know of directly subsidize or regulate gasoline or diesel prices so as to force those prices below international prices, and most tax these fuels heavily at the pump. But there are many more subtle ways that developed countries indirectly subsidize the use of petroleum fuels. If developed countries are really concerned about eliminating all forms of government support that directly or indirectly encourage the consumption of petroleum products, then they might want to re-examine some of their own policies.
These include:
- Tax policies that encourage employers to offer their executives company cars and free fuel in lieu of higher salaries.
- Similar policies that encourage employers to provide free parking for their employees’ vehicles.
- Policies that keep fuel taxes down below the level required to maintain road infrastructure, so that general funds have to be tapped.
- Fuel-tax exemptions and even subsidies for farmers and fishing boats.
- Regulatory loop-holes, and in some countries subsidies and government-purchase preferences, that encourage sales of large, fuel-guzzling flex-fuel vehicles independent of whether or not the vehicles ever use a drop of ethanol.
- Policies that, effectively, subsidize complements to petroleum fuels (e.g., ethanol blended with gasoline).
- Programs that subsidize commercial air service to small airports.
In short, let us hope that the Aomori Accord will encourage all governments — and not just governments of developing countries — to take a long, hard look at a whole host of policies, programs and regulations that favor and perpetuate technologies, and patterns of production and settlement, that work against the mutual goal of reducing the world’s consumption of petroleum products.
