Time to reduce fuel subsidies?

Low oil prices are the perfect time to reduce subsidies and change consumption patterns

Higher fuel prices encourage more economical cars, as this Polish-registered car shows. Photo: Bartek Sadowski / Bloomberg

With the price of crude oil on global markets halving in the space of a year, the countries that subsidise domestic fuel prices have been presented with a rare opportunity to rebalance expectations – and their budgets – without severely disadvantaging citizens.

This is a golden opportunity for countries that produce oil just as much as those that import it. Venezuela is a case in point. Massive subsidies mean that a litre of petrol in Venezuela costs the equivalent of seven fils. Venezuela has become a poster child for the problems of near-freebie petrol prices, though subsidies are not the only reason its economy is in deep trouble despite it having the world’s largest oil resources.

Such subsidies are clearly unsustainable. They drain government coffers and distort the domestic economy. More importantly, they discourage the careful use of a resource that is both finite and polluting. Lower subsidies would also make sense for oil-importing countries like Egypt, where the government earmarks 16 per cent of its annual budget on providing cheap access to fuel and electricity. Last July, president Abdel Fatah El Sisi sharply cut fuel subsidies, earning much applause from the economists but angering ordinary Egyptians worried that the price of everything – tea, bread, the daily commute – would rise as a result.

The UAE too may want to consider the logic of its fuel prices at this time. Here, petrol prices are the highest among the GCC countries but as the World Bank pointed out, UAE drivers pay less than half of the global average price. This makes for little incentive to choose a more economical, less gas-guzzling mode of transport. Some might say that every litre consumed here represents an opportunity cost, in the sense that it is not exported and sold at the prevailing market rate. Reducing domestic consumption would allow us to export more oil – surely a powerful reason to help people learn how to be sparing in the use of fuel. As with cuts to the UAE’s subsidies for power and water, higher prices should help change fuel habits too.