• 1 day PDVSA Booted From Caribbean Terminal Over Unpaid Bills
  • 1 day Russia Warns Ukraine Against Recovering Oil Off The Coast Of Crimea
  • 2 days Syrian Rebels Relinquish Control Of Major Gas Field
  • 2 days Schlumberger Warns Of Moderating Investment In North America
  • 2 days Oil Prices Set For Weekly Loss As Profit Taking Trumps Mideast Tensions
  • 2 days Energy Regulators Look To Guard Grid From Cyberattacks
  • 2 days Mexico Says OPEC Has Not Approached It For Deal Extension
  • 2 days New Video Game Targets Oil Infrastructure
  • 2 days Shell Restarts Bonny Light Exports
  • 2 days Russia’s Rosneft To Take Majority In Kurdish Oil Pipeline
  • 2 days Iraq Struggles To Replace Damaged Kirkuk Equipment As Output Falls
  • 2 days British Utility Companies Brace For Major Reforms
  • 3 days Montenegro A ‘Sweet Spot’ Of Untapped Oil, Gas In The Adriatic
  • 3 days Rosneft CEO: Rising U.S. Shale A Downside Risk To Oil Prices
  • 3 days Brazil Could Invite More Bids For Unsold Pre-Salt Oil Blocks
  • 3 days OPEC/Non-OPEC Seek Consensus On Deal Before Nov Summit
  • 3 days London Stock Exchange Boss Defends Push To Win Aramco IPO
  • 3 days Rosneft Signs $400M Deal With Kurdistan
  • 3 days Kinder Morgan Warns About Trans Mountain Delays
  • 3 days India, China, U.S., Complain Of Venezuelan Crude Oil Quality Issues
  • 3 days Kurdish Kirkuk-Ceyhan Crude Oil Flows Plunge To 225,000 Bpd
  • 4 days Russia, Saudis Team Up To Boost Fracking Tech
  • 4 days Conflicting News Spurs Doubt On Aramco IPO
  • 4 days Exxon Starts Production At New Refinery In Texas
  • 4 days Iraq Asks BP To Redevelop Kirkuk Oil Fields
  • 5 days Oil Prices Rise After U.S. API Reports Strong Crude Inventory Draw
  • 5 days Oil Gains Spur Growth In Canada’s Oil Cities
  • 5 days China To Take 5% Of Rosneft’s Output In New Deal
  • 5 days UAE Oil Giant Seeks Partnership For Possible IPO
  • 5 days Planting Trees Could Cut Emissions As Much As Quitting Oil
  • 5 days VW Fails To Secure Critical Commodity For EVs
  • 5 days Enbridge Pipeline Expansion Finally Approved
  • 5 days Iraqi Forces Seize Control Of North Oil Co Fields In Kirkuk
  • 5 days OPEC Oil Deal Compliance Falls To 86%
  • 6 days U.S. Oil Production To Increase in November As Rig Count Falls
  • 6 days Gazprom Neft Unhappy With OPEC-Russia Production Cut Deal
  • 6 days Disputed Venezuelan Vote Could Lead To More Sanctions, Clashes
  • 6 days EU Urges U.S. Congress To Protect Iran Nuclear Deal
  • 6 days Oil Rig Explosion In Louisiana Leaves 7 Injured, 1 Still Missing
  • 6 days Aramco Says No Plans To Shelve IPO
Big Oil Refuses To Give Up On The Barents Sea

Big Oil Refuses To Give Up On The Barents Sea

Despite failures in the Barents…

Oil Is Stuck In A Range, Waiting For A Catalyst

Oil Is Stuck In A Range, Waiting For A Catalyst

Oil bulls might have become…

The Harmful Impact Of Subsidies On The Oil Industry

The Harmful Impact Of Subsidies On The Oil Industry

Energy subsidies combined with price control can reduce supply when producers do not have a profit incentive to increase supply.

Fuel subsidies and price controls can reduce supply

Venezuela has a nationalized oil company that is legally required to supply gasoline priced at extremely low levels but despite abundant crude oil reserves cannot profitably refine and distribute sufficient gasoline to meet domestic demand. Chinese price controls have caused fuel rationing and shortages in the past. The United States created the Federal Energy Administration in 1974 after the OPEC oil embargo to implement federal oil allocation and pricing regulations. The unhappy result was long lines at gasoline stations and limited supply throughout most of the United States.

India’s oil demand increases after fuel subsidies were eliminated

Oil demand in India has expanded sharply in the last several years despite the removal of oil product subsidies. The increased demand surprised analysts because excise duties were simultaneously imposed on product sales which did not allow as great a price decline as had been anticipated by the drop in the global price oil that began in late 2014.

Related: Saudi Policy Tied to Weak Economy

Fuel Subsidies may hinder low income families climbing the energy ladder

While not precisely and directly correlated, rising income levels generally allow households to climb the energy ladder by increasing use of energy generally, and cleaner energy specifically. However, fuel subsidies as described by the International Institute for Sustainable Development (IISD) Global Subsidies Initiative, exhibit what economist Gordon Tullock has called the “transitional gains trap” which can lock consumers into a particular spot on the energy ladder that limits opportunities for advancement to a healthier lifestyle. The IISD describes the related political phenomenon that parallels the lock in: “Subsidies themselves create a pool of money out of which recipients can influence the very political process than channels money to them in the first place. In many instances subsidies redistribute wealth from a large number of unknowing contributors to a smaller number of beneficiaries. The latter lobby vigorously to defend their handouts; the former seldom bother, or are empowered, to prevent them.”

Related: Oil Falls As Saudi Arabia Questions Freeze Deal

In their paper “Energy Subsidies in the Arab World” published by the United Nations Development Programme in 2012, Bassam Fattough & Laura El-Katiri argue that “Energy subsidies distort price signals, with serious implications on efficiency and the optimal allocation of resources. Energy subsidies also tend to be regressive, with high-income households and industries benefiting proportionately most from low energy prices.”

Conclusion – fuel subsidies and price controls can hurt the people most meant to help

According to the International Monetary Fund, energy subsidies cost the world almost a half a trillion U.S. dollars in 2011. The IMF noted that these subsidies “aggravate fiscal imbalances, crowd-out priority public spending, and depress private investment”. Inevitably these market distortions create disincentive for producing energy that cannot be profitably sold while redirecting previous resources away from households who need to move from using dung and biomass for cooking and heating to cleaner hydrocarbon fuels while also robbing the free market transportation sector from the fuel needed to create and sustain global economic growth.

By Tom Morgan via DrillingInfo

More Top Reads From Oilprice.com:



Join the discussion | Back to homepage

Leave a comment

Leave a comment

Oilprice - The No. 1 Source for Oil & Energy News