Blowing Up The Energy Bubble

A Disneyland theme park and a Shanghai gas station don't normally have much in common, but lately they've shared one important trait: endless lines. During evening rush hour in the Chinese metropolis, long queues of mopeds back up outside the city's main downtown stations, where riders wait up to half an hour to top off. They have no choice: at least 35 stations closed down earlier this year, the victims of government- imposed price controls, which force the stations to sell gas below cost.

National subsidies for petroleum consumption, which keep prices for motorists and other oil users at artificially low levels, are one of a long list of factors—including speculators and terrorist acts—accused of sending oil prices skyward. But recently, energy subsidizers, including many of Asia's largest nations, have come under the most fire. In July, President George W. Bush sounded off against subsidizers, blaming them for keeping demand high, which "may not be causing the market to adjust as rapidly as we'd like."

While it's convenient for the leader of the world's largest oil-consuming nation to direct attention elsewhere, there's some truth to the rhetoric. Before June 19, Chinese consumers were paying half the global market price for oil. When the government made a surprise announcement that day to raise prices by nearly 20 percent, the price per barrel of Texas light sweet crude fell by nearly $5. Now politicians around the world are calling for more of the same, hoping for a quick cure to the plague of costly oil. What's unclear is exactly how much an end to global energy subsidies would reduce the price of oil, and how quickly.

Consumers in dozens of countries, from Egypt to Indonesia to India, now pay well below cost to fill up or switch on the lights. In China, even after the June increase, motorists pay about $2.80 per gallon, versus $3.75 in the United States and $8 in France. In oil-exporting nations, the situation is downright ludicrous: Saudi drivers pay an incredible 45 cents a gallon. But autocracies aren't the only offenders. Even democratic India holds the price of oil to about $80 a barrel.

Pressure from economists and politicians has resulted in some cuts. China's June price hike made it the fifth country to make such a move in recent months. Indonesia, Taiwan, India and Malaysia have also raised retail prices between 10 and 50 percent since late May. And analysts expect more such hikes, in part because the fiscal burden has become too much for most countries to bear. Subsidies are now costing many governments, including India, China and Malaysia, 2 percent or more of GDP. The burden is worse in smaller countries, like Turkmenistan, which pays a whopping 15 percent of GDP to subsidize fuel, according to the IMF.

If oil subsidies were to disappear overnight, that could shave $10 to $40 off the price of oil, says Jim Burkhard of Cambridge Energy Research Associates, who warns that such figures are essentially educated guesses. But no one is expecting that dramatic a shift any time soon. Most subsidizing nations are still poor countries, and many are dictatorships; capping the price of gas is seen as a way to help the poor and preserve social stability, even though many of those who benefit are among the middle and upper classes. "People living in nice apartments with air conditioning in Beijing absolutely should pay more for their energy," says Philip Andrews-Speed, a professor and energy expert at the University of Dundee. The IMF and others agree that the poor would be better off if the billions spent on fuel subsidies went toward other schemes, such as direct cash transfers to the least well-off.