Even as the bill for subsidizing oil prices in various countries ebbs, a few nations continue to either raise local prices by reducing subsidies, or may be looking to move away from them altogether.
Subsidies create distortions in demand, and prevent the normal process of price-induced "demand destruction" to be slowed or halted. Nations that provide those subsidies can cite a litany of reasons why they believe it's good policy for the country itself, but there is no doubt that it holds up demand that might otherwise disappear.
But now it's getting expensive...very expensive. So consider these developments.
--In Peru, the government, which just five months ago ran an advertising campaign promoting fuel subsidies as good price controls across its economy, appears now to have given up on the effort and is set to end subsidies that have been in place for four years, Platts' correspondent Renzo Pipoli reported last week. "The fund is a liability for the future of Peru because we are spending more than 3 billion soles ($1.1 billion)," President Alan Garcia said during a press conference. He said that government officials informed him that the main subsidy beneficiaries are richer Peruvians who can afford to own cars and companies that use diesel for trucks, which is actually not surprising; there's a long global history of controls and subsidies targeted at aiding the poor ending up benefitting those who least need it.
The result of the subsidies: Peruvian consumption figures show demand being unchanged year-over-year, despite the rise in world prices.
--On Monday of this week, Nigerian Oil Minister Odein Ajumogobia said Nigeria will phase out domestic fuel subsidies from January 1, 2009, as high global crude prices push their cost toward Naira 770 billion ($6.5 billion) a year. "Despite the huge demand and potential for petroleum products, most investors still shy away from putting their funds into building or running refineries simply because the products' prices are non-competitive," the minister said. The law of unintended consequences: subsidies distort refining margins and markets, and refineries don't get the work they need.
--This is not about subsidies per se, but there's news today out of Argentina, where a new report shows that Argentina's exports of crude oil and refined products have plunged by nearly 60% over the past 10 years because of declining production, limited refining capacity, high taxes and rising domestic demand. According to the Energy Secretariat, crude oil exports in 2007 fell 35% to a 15-year low of 56,888 b/d, or 9% of production, from 87,534 b/d, or 13% of production, in 2006. That was down from a high of 333,100 b/d, or 40% of production, in 1997.
But it's a government planner's dream otherwise: a tax structure that discourages production and exports, because the tax is tied to international reference prices, and it has pushed the tax rate to more than 70%. The tax system, along with domestic price controls, are deterring investment to find new reserves to offset dwindling capacity at maturing fields. Oil production fell to an average 617,000 b/d in the first five months of 2008, the lowest since 1993 and down from a record 847,000 b/d in 1998, according to industry data. As far as prices, Argentina's pump prices are around 60% below those in international markets, and its import bill is surging.
The domestic price controls on crude are under study. Oil-producing provinces want the crude cap to be lifted to $50-$52/b from $42-$47/b. That would still be about half world prices.
Any wonder their industry is falling apart?
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