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Haley Zaremba

Haley Zaremba

Haley Zaremba is a writer and journalist based in Mexico City. She has extensive experience writing and editing environmental features, travel pieces, local news in the…

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The Worrying Consequences Of Cutting Energy Subsidies

The spread of the novel coronavirus has impacted the entire global economy, devastating economic sectors from foodservice and hospitality to energy. In response to this economically fraught moment as we linger on the precipice of a yearslong recession, some developing countries are taking a “politically perilous” task by removing limits and subsidies on gas and electricity prices. Energy subsidies are particularly important in developing countries with less robust social service programs and tax systems since they are an easy way to provide an impoverished populace with more access to essentials like affordable electricity and fuel. Removing these subsidies now could be a short-sighted solution with harsh implications for the future. “

Governments are caught in a dilemma,” Jim Krane, an energy expert at Rice University told the New York Times. “Do they want to protect the poor who may have lost their jobs and incomes, or do they want to take action against the pernicious long-term cost to their budgets?”

This week the New York Times compiled a list of some of the notable examples of developing countries that are taking part in the subsidies-slashing trend: “Nigeria and Tunisia have lowered fuel subsidies in recent weeks, and India has raised taxes on gasoline and diesel fuel. Sudanese officials plan to replace some subsidies with direct cash payments to the poor. Venezuela, where the economy was collapsing before the pandemic, has partly reversed decades of gasoline subsidies. And the state-owned electric utility in Dubai is seeking to raise rates for the first time in a generation.”

Related: OPEC+ Panel To Discuss Compliance With Oil Production Cuts

But so far these leaders are not receiving the political backlash for these decisions that they would likely receive in less extraordinary times. There are a few reasons for this. A large part of the reason that the removal of fuel price subsidies hasn’t been met with outrage is that fuel prices are shockingly low. Globally, oil prices still have not yet recovered from the massive oil price crash that took place at the end of April, when the West Texas Intermediate crude benchmark plunged to nearly $40 a barrel below zero, and it looked like Brent could be soon to follow. One factor that led to the massive downturn in oil prices, low demand for oil, also persists, as “driving, flying and industrial activity have dropped off sharply.”

Just because there hasn’t been backlash yet, however, certainly does not mean that it’s not coming, and coming soon. Industry experts are in dispute about when energy markets will bounce back, but the consensus is that they will do so, and the effects of the easing of energy subsidies and price limits will be felt sharply. “Energy subsidies are often taken for granted outside the halls of power,” reports the New York Times. “But they constitute vital policy choices that weigh on government budgets and economic development.” 

When energy prices do recover, however, and the populace in these developing countries are faced with rising and inaccessible prices for essentials like cooking oil and petroleum, these governments are looking at potentially severe social unrest. “Any price increase hurts people earning subsistence wages,” warns the New York Times. “And cuts in subsidies have prompted political protests, riots and strikes from Iran to Indonesia.”

There are, however, plenty of detractors to the idea of energy and fuel subsidies, and economists at the World Bank and the International Monetary Fund have long advised countries to ease off these subsidies. One critique is that these policy measures don’t, in fact, do much of anything to help the poor that they claim to protect, but instead are a boon to higher-earning families who own cars and have electricity in their houses and are therefore more affected by the targets of the subsidies. Furthermore, these measures can be seen as political populism, “a ‘flag’ waved by politicians and activists to win votes.” The money devoted to these measures also takes money away from other government initiatives like social services, healthcare, and education, and “experts say government spending on fuel and electricity makes it harder for officials to spend on health care and education. It also encourages people to use more energy than they need, increasing air pollution and traffic congestion.”

While there are many good arguments for getting rid of energy subsidies in developing countries, once they are in place, it is politically fraught to take them away. And doing so on the eve of a yearslong recession, with soaring rates of unemployment and civil unrest, seems like a particularly risky move.

By Haley Zaremba for Oilprice.com 

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Leave a comment
  • Maxander on June 15 2020 said:
    Subsidies, lower taxes were the mechanisms through which oil & gas producers could sell energy at lower costs to consumers.
    & now when we say subsidies going down & higher taxes are in place, that means producers, oil marketing companies most likely to raise prices of energy commodities for consumers. This could be governments' desire for higher prices, inflation.

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