By - Jim Vess

Worldwide fuel subsidies rising under pressure from higher oil prices, EIA says

Energize Weekly, November 7, 2018

After a sharp decline, global fuel subsidies rose in 2017—under pressure from rising oil prices, according to the International Energy Agency (IEA).

Worldwide fossil fuel subsidies had fallen by almost half to about $250 billion between 2012 and 2016. In 2017, they rose 12 percent to $300 billion, according to data from the IEA’s World Energy Outlook.

In 2016, for the first time, fossil-fueled electricity subsidies were higher than for oil, but in 2017, oil was once again the most heavily subsidized energy carrier.

“Most of the increase relates to oil products, reflecting the higher price for oil,” IEA energy analysts Wataru Matsumura and Zakia Adam, said in an assessment. “The run-up in the oil price in 2018 is putting pricing reforms under pressure in some countries.”

High oil prices from 2010 to 2014 spurred many oil-importing countries to embark on subsidy reform. The fall in oil prices in 2014 offered a cushion for those efforts underway in many countries, including Indonesia, Mexico and Malaysia.

Oil-exporting countries also started fuel reforms as a way of managing their overall resource. Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates all increased domestic prices for gasoline, natural gas and electricity in recent years.

“The rise in international fuel prices in 2018 could set back efforts to phase out fossil fuel subsidies,” the IEA analysis said. This is exacerbated by local currencies depreciating against the U.S. dollar.

A 75 percent rise in the dollar-denominated Brent crude price since January 2018, for example, translated into a more than a 100 percent rise in Indian rupees and a 250 percent increase in Argentinian pesos.

“Facing these pressures, some countries have started pushing back their reform schedules by postponing price increases or otherwise protecting consumers from their efforts—while in most cases keeping the overall policy goal of market-based pricing in place,” the analysis said.

Malaysia and Indonesia have maintained their domestic prices at previous levels. India has cut the excise duty on gasoline and diesel. Brazil, after protests and a truckers’ strike, increased its subsidy on diesel.

“There can be good reasons for governments to make energy more affordable, particularly for the poorest and most vulnerable groups,” the analysis said. “But many subsidies are poorly targeted, disproportionally benefiting wealthier segments of the population that use much more of the subsidized fuel.”

These poorly targeted or untargeted subsidies can encourage wasteful consumption and be a burden on government budgets. “Phasing out fossil fuel consumption subsidies is a pillar of sound energy policy,” the analysis said.

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