Fuel Subsidies Overseas Take a Toll on U.S.
JAKARTA, Indonesia — To understand why fuel prices in the United States have soared over the last year, it helps to talk to the captain of a battered wooden freighter here.
Freighters in Jakarta run on diesel, kept cheap by subsidies. Subsidizing nations make up nearly all the growth in oil demand.
Without a kerosene subsidy, one economist says, many Indians would turn to wood for cooking.
He pays just $2.30 a gallon for diesel, the same price Indonesian motorists pay for regular gasoline. His vessel burns diesel by the barrel, so when the government prepared for a limited price increase this spring, he took to the streets to protest.
“If the government increases the price of fuel any more, my business will collapse totally,” said the boat captain, Sinar, who like many Indonesians uses only one name.
From Mexico to India to China, governments fearful of inflation and street protests are heavily subsidizing energy prices, particularly for diesel fuel. But the subsidies — estimated at $40 billion this year in China alone — are also removing much of the incentive to conserve fuel.
The oil company BP, known for thorough statistical analysis of energy markets, 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.
In most countries that do not subsidize fuel, high prices have caused oil demand to stagnate or fall, as economic theory says they should. But in countries with subsidies, demand is still rising steeply, threatening to outstrip the growth in global supplies.
President Bush warned about the effects of subsidies on July 15. “I am discouraged by the fact that some nations subsidize the purchases of product, like gasoline, which, therefore, means that demand may not be causing the market to adjust as rapidly as we’d like,” he said.
Indeed, the biggest question hanging over global oil markets these days may be how much longer countries can keep paying the high cost of subsidizing their consumers. If enough countries start passing the true cost of oil through to their citizens, many economists believe, demand growth will slow, bringing the oil market into better balance and lowering prices — although the long-term economic rise of China and other populous countries makes it unlikely that gasoline prices will plunge back to the levels of several years ago.
China raised gasoline and diesel prices on June 21, though still keeping them below world levels. World oil prices plunged more than $4 a barrel within minutes on the expectation that Chinese demand would slow.
In Indonesia, the government spends six times as much on energy subsidies as it does on agricultural investments, even as rice prices have skyrocketed this year.
Many countries, like India, have raised oil prices considerably in recent months, only to watch world prices climb even further, pushing up the cost of subsidies once again. China’s estimated $40 billion in subsidies this year is up from $22 billion last year, mainly for this reason, although consumption has also risen, with Chinese buying 18 percent more cars in the first half of this year than in the period a year earlier.
Political pressures and inflation concerns continue to prevent many countries — particularly in Asia, where inflation has become an acute problem — from ending subsidies and letting domestic prices bounce up and down.
“You talk about subsidies, you’re not only talking about the economy, you’re talking about politics,” said Purnomo Yusgiantoro, Indonesia’s minister of energy and mineral resources. He ruled out further price increases this year beyond one in May that raised the price of diesel and regular gasoline to $2.30 a gallon.
Nobuo Tanaka, executive director of the International Energy Agency, said that subsidies were clearly a big factor contributing to the mismatch in supply and demand that has helped push up world oil prices. “We think the price mechanism is not working enough to make consumers more efficient,” he said.
Indonesia spends more on fuel subsidies, $20 billion this year, than any country except China. Some economists estimate that fuel use in Indonesia would fall by as much as a fifth if the government were to eliminate subsidies entirely.
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