Eliminating Subsidies Won't Cut It (Demand for Oil That Is)

Cheap gas and diesel due to government fuel subsidies has become one of the favored whipping boys of late—a convenient way to blame high oil prices on the actions of some other government or faraway people (See 1 2 3 4 5 6 7 8). But how much can subsidies really be blamed for present oil demand? Would cutting a 30% gasoline subsidy reduce demand by 30%? Why not? I’ll stake out and defend a somewhat extreme position: reducing, or even eliminating fuel subsidies will not cause a significant, long-term reduction in demand and may even cause demand to increase more quickly than with subsidies in place. More importantly, we must not fall prey to claims that cutting fuel subsidies is an easy solution to our energy problems.

A Hummer dealership in Caracas, Venezuela, where consumers pay only pennies for a gallon of gasoline as reported by the New York Times

Fuel subsidies are currently in place for nearly half the world’s population. Fuel subsidies around the world have previously been covered at The Oil Drum in Fun With Subsidies and Taxes, as well as numerous articles in the media on the topic in the past few weeks (links above). Additionally, most OECD states indirectly subsidize fuel consumption in a variety of ways. I won’t rehash this existing coverage, though I do need to point out that every article* I’ve been able to locate has argued that cutting subsidies will have a significant effect on demand, and will help to lower oil prices (*only one analyst, Benoit de Vitry of Barclay Capital, seem to agree with me). To me, this wave of media coverage of subsidies is just like the waves of media coverage past on speculators, big oil conspiracies, and the promise of oil shale: a source of false hope that a magical solution exists to our energy problems. For that reason, my intent here is to argue that the long-term effect of cutting fuel subsidies is, contrary to the reports in the media, not of much significance.

Demand Elasticity is a Marginal Matter

The first reason that cutting subsidies won't have a dramatic impact on demand is that the fuel demand elasticity of a country is the aggregate of the marginal demand elasticity of each of its consumers. For that reason, the elimination of a 30% subsidy for fuel will not result in a proportional drop in demand of 30%. For some users, price increase will completely price them out of the market, and their marginal demand will be completely eliminated. For others, either because of wealth or the value of liquid fuels to their economic activity, the elimination of the subsidy will result in no decline in consumption. The vast majority of consumers will lie somewhere in between. Therefore, right at the outset, we can say that the elimination of a 30% subsidy will not result in a 30% drop in demand. I’d love to be more precise on this point, but neither the data nor methodology currently exists to project with any confidence exactly how much demand reduction would result from the elimination of subsidies—all we can say with any certainty is that it will be smaller than the size of the subsidy eliminated.

Evaluating the Energy Intensity of the Opportunity Cost to Subsidy Expenditures

The next question—and perhaps the most important—is to evaluate the opportunity cost of a government’s expenditures on fuel subsidies. If a government does’t spend $X billion on fuel subsidies, what will it spend the money on? What is the energy intensity of that expenditure compared to the amount of demand reduced through cutting the subsidy?

Take India, for example. In India, the total cost of fuel subsidies could be as high as 2-3% of GDP. What happens to that spending if it doesn’t subsidize fuel use? There are two theories here, both of which create at least some fuel consumption that didn’t exist before. One theory is that it will be spent in a way that results in lower fuel consumption—but almost certainly not in a way that results in NO fuel consumption. The argument in favor of this position is that, because fuel subsidies distort economic calculations in favor of consuming fuel, a neutral use of the same amount of funds should result in less fuel consumption. However, there is an opposing position: because subsidies are, according to market theory, a sub-optimal allocation of resources when compared to free-market allocation, the elimination of subsidies will result in stronger economic growth (or less economic decline) than with the subsidies. This is especially true if the money saved from subsidies isn’t spent at all, but rather reduces the tax burden or lowers the rate of inflation. It remains potentially true to a lesser degree even if the money is merely spent elsewhere, since neutral spending is likely to have a less distorting effect on economic activity. Therefore, according to this theory, elimination of a fuel subsidy may actually result in greater fuel demand over the long term—and that demand may be even more inelastic because it stems from a more efficient allocation of resources. This is the argument of Benoit de Vitry of Barclay’s Capital. In the end, it may come down to this question: What’s worse (from the admittedly very skewed perspective of demand management): 100 million Indian middle class paying 40% under market for diesel with a GDP growth rate of 5%, or 200 million Indian middle class paying market for diesel with a GDP growth rate of 7%?

Cutting Subsidies Won’t Slow the “Export-Land” Effect

Finally, cutting fuel subsidies in exporting nations won’t significantly slow the grinding effect of the Export Land Model, whereby rising revenues of fuel exporting countries lead to increasing domestic consumption and declining net exports. What happens if subsidies are suddenly cut, and citizens of Venezuela or Saudi Arabia have to pay the market rate for oil? The extra money they spend on oil goes to their own government, rather than to some other nation. And that money can then be spent on other projects or programs—the opportunity cost issue noted above. However, to make the cuts in subsidies viable, they are likely to be offset by progressive spending plans that disproportionately benefit the poor. This is exactly what is currently happening in Malaysia. The result may actually increase demand: the rich, who are not the beneficiaries of these offsetting handouts, are also the least likely to reduce their demand due to price rises. The poor, who may otherwise reduce their demand, are the most directly benefited by the handouts. And, because it may be possible to prevent any demand destruction by simply handing out 1/2 or 2/3 of the money previously spent on subsidies to the poorest consumers, there is likely to be money left over to be spent elsewhere (or not taxed in the first place), which brings us right back to the previous discussion on the energy intensity of that alternative spending.

To conclude, I’m certainly not advocating the maintenance or increase of existing fuel subsidies. They are an inefficient allocation of resources, resulting in less economic activity for every barrel of oil consumed. Rather, my intent here is only to dispel the notion—increasingly popular of late—that eliminating fuel subsidies is some kind of magic bullet to derail the demand train. At best, I think the elimination of fuel subsidies will result in a minor and short-term decrease in the rate of demand growth in developing nations. It will not significantly alter the energy crisis facing humanity. Either way, the elimination of subsidies may not be politically practicable—where they have been cut there have been riots (1 2), and there are numerous movements attempting to actually increase fuel subsidies (1 2 3 4 5).

Thanks for an excellent post. It is a central subject to consider. It also works the other way around in that in Europe for example motor fuel is taxed heavily and since price has risen and tax has not fallen motorists vote with their credit cards, they buy less so consumption is falling. In those countries with subsidies the income to fuel price differential remains large. A small increase in Chinese retail prices is having an effect. People start sharing cars and using less too. Car sales are still booming hugely but the volume is still relatively low so far on a per capita or per GDP unit basis. If we look at prices per GDP purchasing power unit and personal incomes I agree that dumping subsidies will not resolve the global demand/supply issue or even dent it.

Regarding the Export Land Model (ELM), I assumed a country producing two mbpd, consuming one mbpd and therefore exporting one mbpd that hit final peak production, with production declining at -5%/year and with consumption increasing at +2.5%/year. This resulted in net oil exports going to zero in nine years. The net export decline rate for a given exporter is a function of their consumption as a percentage of production at final peak, their rate of change in production and their rate of change in consumption. Mexico, like the ELM, the UK and Indonesia, was consuming about half of their production at final peak, and like these examples, Mexico is on the fast track to zero net oil exports by 2014, at the outside (10 years from their peak in 2004).

In any case, if we assume no increase in consumption, Export Land would go to zero net oil exports only five years later, 14 years to zero instead of nine--not exactly a big difference.

It seems to me there is little incentive for oil producers to protect export volume if export revenues continue to rise. As long as increasing domestic consumption does not erode oil profits, then governments are unlikely to change subsidies.

But over the long run, cheap petrol and diesel is only workable as an opiate of the masses in countries that produce more of it than they consume. Developing countries that import oil and subsidize fuel will increasingly face fiscal disaster.

On the other hand, every oil importing nation may eventually be forced to subsidize fuel prices for key industries like commercial/industrial transportation and agriculture while rationing non essential consumption.

I agree that there will be a push to continue or increase subsidy to certain industries, but I don't think we can ignore the political will to use fuel subsidy as a populist measure. There is a great deal of sunk cost in the assumption of continuing ability of cheap energy--suburbia, cars purchased, roads built, etc.--and there will be a great deal of pressure to use subsidy, even if it leads to financial trouble, to maintain the viability of these sunk costs. Developing countries may have less of this sunk cost, but they also tend to have larger populations of people who aspire to move up to the idealized "middle class" status of a suburban home and a car, and that will only increase the pressure to populism. There also tends to be a greater need to pacify the populace in developing countries--take China, for example: the previous constitutional basis of Maoist theory, equality, etc. has largely been replaced by a capitalist mentality, therefore the authority of the current authoritarian regime is now based on their ability to deliver increasing wealth to the people. They're likely to incur great long-term problems to eek out a few more years of maintaining a facade of growth and increasing wealth for the poor, and that will partly mean fuel subsidy...

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It matters. Thanks.

"I’ll stake out and defend a somewhat extreme position:" -- I see nothing extreme about your position. Consider this: When gas in the US rose from $2 to $3 did demand fall at all? No, it actually increased!

One theory runs that most people in Asia are less well-0ff so it will hurt them more. The problem is that that there are ten times more of them, meaning that their well-off probably equals our well-off, so whatever reduction in demand takes place in US will be offset by increase in Asia. I think you are spot-on. Yet another factor is that they are driving a new, smaller fleet of more efficient cars so that these prices don't hurt them as much as Joe Sixpack driving his F150 and soccermom her LandRover, both of which are financed to the hilt.

You raise an interesting point here. I think there is a similar psychological/social motivation to own a car (even a very small one) in China or India as there is to own a big SUV or truck in the US.

Also, the high fuel taxes in Europe have something of a similar effect to the small cars driven in Asia, in that they make the increases in underlying oil prices less significant. If you've already oriented your life, work, housing, etc. in Germany around $8/gallon gasoline, it's not a huge change in your budget when that goes up $2 because of underlying oil price increase. On the other hand, an exurbanite in the US who oriented their life (exurban home that they're probably upside down on, big F250, long commute to work and shopping and kid's school, etc.) around $3 gas, it's a huge change in your budget to go up those same $2 to $5/gallon gas...

Yeah, but when gas rose from $2 to $3 home values were shooting through the roof, and availability of credit on that equity was free and easy. Oil supply and demand do not live in a vacuum...

I would also wager that the elasticity with regard to demand for oil drops rapidly at some point - so behavior doesn't change until it cross some threshold - mostly because those changes are significant. In other words there is a point at which consumers change behavior in response to oil prices - and that change is somewhat drastic with regard to consumption - e.g., carpooling (which is a hassle) instead of taking one car cuts your daily gas consumption by 1/2 (roughly) and so that hassle might not make sense at $3 but at $4 it does - the resulting change in consumption is a toggle on/off...

Subsidized commodities tend to be available in inflexibly limited amounts. And by "inflexibly limited" I mean even more inflexibly limited than mere nature requires.

The more usual case, with natural gas and petroleum-derived fuels, of heavy consumption taxes -- negative subsidy -- makes government push them by means that are available only to it. Laying urban developments out in such a way that people have to drive long distances often, for instance.

--- G.R.L. Cowan, H2 energy fan 'til ~1996

This is an interesting argument, is there actual correlating data to back it up or even historical causal evidence to prove it?

Correlating data are more likely to be available than proof, I think, if by proof one means Hansard or local council excerpts saying anything like "We must make them burn more fossil fuel"; one would not expect such candour.

Here's an instance of the argument being used predictively: http://autos.groups.yahoo.com/group/future-fuels-and-vehicles/message/5123

--- G.R.L. Cowan, H2 energy fan 'til ~1996

Thanks for this post Jeff. Regardless the fact that I like the argument, I'd like to see at least a back of the envelope calculation. Let's limit our discussion now only for direct subsidies, that is ignoring the whole of the US/AUS/JAP/EU military expenditure in the Middle-East, etc.

1. The amount of fuel subsidy per volume unit of fuel in each country and how much would the price rise if subsidies were removed completely

2. The total amount of consumption in all countries that have subsidized fuel prices

3. A price (in)elastic equation showing probable short/mid-term consumption decrease as a percentage of original consumption, duel to the price rise from subsidy elimination.

4. Calculation of total absolute fuel consumption eliminated as a result of price elastic behavior change in each subsidized country.

5. Oil to fuel distillation ratio and calculation of how much crude oil would be used less, if pump fuel consumption would fall by X barrels/day.

Noting that most OPEC exporter countries' citizens are paying c. 1/5th to 1/10th of the real world price for their pump fuel and that even Chinese are paying -30% to -50% less than the world price... well, that's not a small amount of oil, I'd guess.

Now, what that cut in oil consumption (short to mid-term) would to the oil price is a different thing altogether, but I'm not sure that the potential cut in oil consumption would be inconsequential. After all, ME + Asia do account for roughly 33% of the oil consumed today and their share is growing the fastest.

Also, there is no saying what it would do the growth in fuel consumption in the aforementioned areas, if prices were to double or to increase manifold. I guess it would wreak havoc in the economy and may be even do structural damage to consumption for a longer term than just the short term.

But alas, all that is theoretical as it would be suicide for any politician to put through such measures and as such they will rather drive their economy to the ground and blame foreigners, than take the heat from the voters for eliminating the subsidies :)

PS To get a rough idea of subsidies, the following might be helpful, although not conclusive:


In the short term, I don't see a drop in subsidies significantly affecting consumption. In the longer term, it will. In Europe, we have had high fuel taxes for twenty years, and as a result we drive smaller, more efficient cars than the US. However, the trend for the last ten years has been for larger, more powerful, heavier cars in general, and a fashion for SUVs in particular, because disposable income has been rising way ahead of the cost of fuel. We do not drive any LESS because of the fuel price. We are now just beginning to see a reduction in fuel consumption, due to changed driving behaviour. I suspect this effect is limited and short term, it is due to people driving more slowly and smoothly, etc., and cutting out a few unnecessary journeys, because of the price shock. However, our attention span is short, and behaviour will return to normal soon, if the shocks do not continue.

Our shocks are less steep than yours, precisely because of our high taxes. Indeed, our government has been reducing the taxes in real terms these last two years.

I think that a sudden removal of very high subsidies might cause a short term economic dislocation, as it would be difficult for people to adapt at short notice. However, that would simply make efficient transition to a reduced oil society even harder to implement.

Of course, we know price shocks will continue, and soon shortages. Those WILL reduce consumption.

Other critical factors in European demand are the higher population density, tighter city streets, less of a "cowboy psyche" whereby big trucks are socially preferred, greater availability of mass transit for short AND long-distance trips, more of a green consciousness, etc. I'm not sure how much of Europe's different driving habits are due to the former, and how much is due to higher prices/taxes, but my opinion is that the former factors are more significant than price. There have been periods in the past few decades when gasoline/diesel price just wasn't a very significant factor, and the European driving habits still differed in the same ways from America--I think this suggests that the key reason is cultural/geographic, and not price...

True, but I suspect that as fuel prices increase, more Americans will begin to demand European-style public transport, and then the political direction will hopefully be towards building more efficient transport.

At least I hope that will be the case. I am worried that the government will think that it is easier just to subsidise fuel, rather than make lasting transport improvements. The government will provide what the people want, but most people over here in Europe seem to be demanding subsidies rather than more efficient trains. (English trucker strike, Portuguese fuel riots)

I really don't follow the logic on the cutting subsidies won't cut demand. To the degree that it makes oil more expensive it definitely will cut demand and spur investment in alternatives. People underestimate the demand response mechanism that consumers have with regard to oil. For instance in February California cut fuel usage by 2.5% year over year compared to 2007. The bigger problem, though, isn't the direct subsidies such as tax credits - its the external costs that are borne by the commons, and for the most part show up somewhere else on our grand societal income statement - pollution, environmental degredation, military costs to protect our oil interests - these are subsidies as well - and a big part why renewables look expensive in comparison.

Even though these externalities are nebulous and hard to quantify it doesn't mean that they aren't real costs to us individually through our taxes and collectively. The reality is that our energy market is so badly gerrymandered that it doesn't function well as a capitalist market at all - and the more we mess with it the worse it performs - both with regard to the cost of oil and with regard to the market's stimulation of alternatives. This leads to volatility due to a lack of transparency (hard to do a risk/reward analysis when an oil minister or elected official can radically change the nature of your market overnight) and ultimately a higher cost of capital for investment in alternatives (to offset uncalculable risk) as well as existing fuels needing to cross a higher price hurdle before investments are made in alternatives (to create a margin of safety for the capital). All of this slows down investment and prolongs oil's stranglehold on our economy. We need to clean up that market - and getting rid of subsidies is a good start.

Cutting subsidies might not be an "energy policy" panecea - but its a step in the right direction.

More expensive oil can spur investment in alternatives all it wants (this is also an energy intensive economic activity), but it can only PRODUCE alternatives to oil to the extent that technology allows. I'm not overwhelmed by any of the alternatives in the pipeline, but that's just me.

I disagree that people underestimate the demand response mechanism that consumers have with regard to oil. Oil prices have risen in China (AFTER subsidies) and India over the past few years, and demand has continued to explode. A 2.5% decline in demand in California is nothing compared to the increase in price, and is not representative of the US as a whole (where YOY demand has decreased much less than that). US gasoline demand as a whole was down in February YOY (just like California), but was only down 1.4% YOY as of the first week in June (based on EIA's 4-week average). 1.4% isn't a very impressive decline in demand given the increase in price. If demand destruction isn't greater than the rate of depletion post-peak, there's a problem (OK, there's a problem regardless...).

I agree that the unaccounted for externalities are a huge issue, but I don't see any hope of tackling them in the near future. As prices go up, the probability of prioritizing the environment over immediate perception of economic needs goes down.

Also, I agree that cutting subsidies is a step in the right direction, but not because it will either benefit the economy or reduce demand (it's just as likely to push toward VERY dirty coal-to-liquid fuels for cars). I think it's the right move because it improves economic efficiency, but we need to remember that a more efficient economy structured toward growth will grow faster--and the long-term result of that may be more (or at least less elastic) demand... I'd love to see a totally transparent, subsidy free economy, but that just isn't likely to happen.

Actually a 2.5% decrease in fuel usage is not trivial, either from a consumption standpoint or from a market impact basis. First off any decline in consumption is the functional equivilent of increasing domestic production by the same amount so its perhaps the easiest way for us to reduce our energy dependence. For every 1% we reduce usage here in the U.S. we cut our daily oil usage by just a little under 1MM barrels. And the reality is that CA is out ahead of the curve on this issue - so I would expect the rest of the U.S. to catch up to those rates. Lastly, the EIA numbers are hard to use because you have to adjust for the SPR and inventory buying which screws up true consumption - while the CA numbers are from the franchise tax board and track gallons at the pump very effectively. Finally, if that 1.4% YOY number you quote above is YTD that is a.) less important than the trendline - we care about what is happening at the margin rather than cumulative, and b.) will be off by about 0.75% anyway because YTD 2008 is one day longer than 2007 so far - so has an extra day of consumption.

That 2.5% is at the margin equal to a 5% or more change in prices because the supply/demand curve is so tight.. Your point about the price just illustrates how oil had been underpriced in the market relative to its utility... only now are we reaching the point where elasticity on oil is shrinking - and again for consumption purpose most changes are step changes not incremental.

As for alternatives - my point is that oil consumption in the U.S. is more flexible than the peak oil scenario allows for... so our first alternative is to conserve. Peak oil theory assumes switching will be impossible for a significant amount of time(which may or may not be true, e.g., algae was a crazy idea back when peak oil theory was put forth) and second and more importantly it completely underestimates, as almost all studies of these things do, the ability of a wealthy society such as our own to conserve when necessary (in this case due to high prices) other examples include California changing electrical usage habits to cut nearly 10% to stop rolling blackouts and gain control over its energy market again, or recently in Juneau Alaska where users cut electrical use by 40% when their sole source of cheap electricity went off line due to a transmission tower failure ... The U.S. makes up roughly 20% of worldwide demand of oil - or 4x our population foot print - and about 2x what Europeans use... so there is a bit of fat in our usage pattern. Just because we haven't conserved in the past, doesn't mean we won't in the future.

A 1% decrease in consumption, year on year, is a 0.2 Million barrel per day reduction, not a 1 Million barrel per day reduction. That said, I don't disagree that conservation in the US is the way to go--I think you're right on the mark here. And I think that we will decrease our demand in the US, I just don't think that we'll decrease it anywhere near as fast as net export availability on the global market begins to decline over the next few years. Even if we can get demand destruction up to 2.5% per year (we're roughly half-way there at current figures), that would probably be less than half the rate at which net exports decline...

Not to bicker, but I don't understand what you're saying that a 2.5% decrease at the margin is actually a 5% change in price. Demand has actually decreased around 1% year on year in the US, and price is up 70+%. I'm not sure what you're arguing?

I agree that there is some "fat" in our usage pattern, but there is also much greater sunk cost in the US than in Europe (e.g. suburbia) that supports our high level of consumption.

Okay no more multi-tasking when posting.... 1.) You are correct - I grabbed the global consumption number not U.S. when calculating the 1% savings. Even then I screwed up because a 1% reduction in refined oil equals a 2% reduction in crude consumption. 2.) I shifted to the refined products market to make a point but didn't explain that at all to you the reader - The price leverage I was talking about comes from an ethanol study done by Iowa State University which showed that the addition of Ethanol to the fuel supply (totaling about 4%) saved motorists approximately 10-15% at the pump (rough numbers) - which (if you believe the study) means that the marginal 4% of fuel supply is getting a 2-3x leverage in change in price given current supply and demand. Were oil prices to flow directly through to gas prices I suppose that would be a bit more useful an argument... It does, however, illustrate how gas prices have begun to reach a point of inelasticity... and that also underscores how oil prices are behaving differently - which could be an indicator of speculative bubble on oil futures (which I believe is true to the tune of about 20-30%) but is likely due to a number of other factors as well.

Your point about conservation is truly the crux of the biscuit - Peak Oil theory is predicated on economic growth being tied to oil consumption - in that scenario consumption can't be curtailed without economic pain - so we either consume or suffer drastic economic (and therfore societal) upheaval. This makes the supply side much more important to the pricing equation - and where declining supply results in ever acclerating prices in a net sum zero game. The problem is that conservation (or to put it differently how efficient the use of oil to drive economic growth is) isn't calculated at all and neither is shifting due to technological change - particularly in those net importing countries that are the biggest consumers of energy. As a result, worldwide consumption is overestimated because small changes demand behavior in those large importers have large impacts on export markets (where ELM models show no impact whatsoever). And producer country consumption growth (a key component for dwindling exports) is grossly overestimated because they are primarily based on models of industrialized nations such as the U.K. where industrial and economic growth wasn't tied to oil production because of the availability of inexpensive imports. In countries where oil is the primary source of national income that same pattern is unlikely to emerge (because a.) growth in those countries IS tied to oil and 2.) without other industries to support a middle class there is only so much oil the ruling class can use (e.g., a 4% per capita consuption growth rate for Saudi Arabia is silly). This doesn't mean that we won't run out of oil - just that the Peak Oil model has way overstated the impact of dwidling supply in its pricing model mostly by underestimating flexibility in the demand model to react to higher prices to curtail consumption...

Maybe Europe has some natural advantage over the U.S. due to its geography and mass transit infrastructure (to the degree it does, however, its way overblown as a contributing factor) - there is still the fact that Switzerland and most of Western Europe is nearly twice as efficient per GDP dollar than the U.S. So lowering our consumption by more than 2.5% a year without impact on standard of living are well within reach. And since the U.S. imports 50% of its oil - that 2.5% reduction in total consumption of oil is the equivilent of 5% of our imports - we represent 25% of the world import market so that 5% is 1.2% of the world export market - or equal to the rate of projected decline in world exports. How it gets done will be a combination of a number of things - but the biggest, and perhaps the biggest reason that Europe is more efficient than the U.S. today is automobile efficiency. Expect the gas mileage of the U.S. auto fleet to change dramatically over the next few years - even without CAFE standards - it did in the 70s when small cars were crap - today many small efficient cars are quite nice - and there is the whole diesel issue as well which can further change the fuel efficiency of the U.S. fleet (which if bio-diesel starts to work its way into the fuel chain in any significant amount will also make a huge impact on import demand). Second, and this is admittedly a bit warm and fuzzy reason, but the shock to our wallets has opened our eyes to the way that we can make small changes to conserve - and even more importantly that there are options for indivuduals to shift the recurring costs of energy consuption to a capital cost through existing renewable technologies. For instance, in our family we used to segregate our cars by driver - mine and hers - I drove mine, she drove hers - even if it was just her despite the fact that she has a big minivan that gets lousy mileage ... Now we use the smaller car first and the larger car when needed... My car is 30% more efficient so if that shift in driving habits is 10% of our miles driven (which is very conservative) we just lowered our annual fuel consumption by 3% without making any sacrifice at all... It has also gotten people thinking about renewables... At current fuel prices the payback on solar and wind power to support a plug in hybrid would be somewhere around 5 years - less when combined with a system for the household electric. If we get feed-in tarrifs in CA that number goes down further... If gas goes down to $2.00 again and my payback goes up to 10 years - so what - I am free of the two recurring expenses I hate the most - PG&E and the gas station... and I still have 10+ years of free "fuel" left on those systems...

The Hummer picture is very representative of the first thing that springs to many minds when high oil prices and subsidies are discussed. However, we shouldn't forget that, for many of, say, India's 1.1 billion population (and the populations in many other developing nations), the subsidy that matters is the one that keeps down the price of kerosene used for cooking and lighting. That demand is surely even less elastic than demand for motor fuel, making removal of subsidy very problematical for riot-averse administrations. India did not reduce subsidy on kerosene when it recently raised prices for gasoline and diesel.

So... Lemme see if I have this right, are you suggesting that the 50% difference in oil consumption per capita between the US and Europe is caused by....? Or that the 50% greater oil consumption in qatar vs the US is caused by other than subsidies?

It's fairly clear that the demand curve for oil is somewhat discontinuous, it has flat spots and steep spots and is slow to respond over time, but it is ludicrous to suggest that it is simply dead flat. Removing a 30% subsidy is unlikely to result in a 30% drop in consumption, but it is absolutely certain to result in some % reduction in demand. A total reduction will be seen over several years. Notice that although there was an actual increase in oil consumption in the US from $2 to $3, there has been a substantial reduction in consumption on the road from $3 to $4.

As far as the alternate uses of the money go, ANY use of the moneys by government will constitute a suboptimal resource allocation and thusly slow growth by roughly the same amount. Only if the cost is offset by lowering taxes (anyone see that happening?) will it result in faster economic growth.

I think the 50% difference in US v. European oil consumption is, as I argued above, primarily due to geographic and cultural factors, not price.

Having lived in Qatar, I think that some of the same factors are true. I've swam in a cooled swimming pool there, and walked through a 6-story air conditioned shopping mall. I'm sure that subsidies have an impact, but I'm equally convinced that cutting subsidies wouldn't have a very significant effect on their consumption.

I don't think you can support the assertion that cutting a 30% subsidy is "absolutely certain" to result in some % demand reduction. It still depends on what the opportunity cost is of that spending, and the energy intensity of that opportunity cost. It's similarly not true that alternative uses of the money will be equally suboptimal (politicians can make good calls, they're just not very good at it!). The most likely scenario, since most of these nations are already in deficit spending mode, is not lowering taxes, but rather a decrease in monetary inflation, and that will almost certainly result in a more optimal allocation because it will result in a market-driven allocation. That can very realistically accelerate growth...

I am no economist but here are my thoughts.

I don't think the loss of subsidies is a magic bullet but I do think it will lead to less demand more quickly as the market price increases. I agree that a 30% reduction in subsidies isn't going to lead to a 30% reduction in demand but this seems like a straw man argument to me. Who is proposing such a relationship?

As for opportunity cost, if the "less distorted" market now results in greater growth, I think it will be because the economy will have become less oil dependent. What is a well "oiled" market to do when one resource (oil) gets more and more expensive? Find a substitution. This applies to government savings as well. If the governments had any sense, the newly found savings would be spent on facilitating substitutes.

Since you're export land arguments are essentially the same as your opportunity cost arguments my arguments above also apply.

Degree of oil dependency doesn't cause or reduce growth, so I disagree that the cause of greater growth in the absence of subsidies is because the economy is less oil dependent. More efficient allocation of resources does lead to more growth (or less decline), and that's the key here.

The substitution argument is the classic free-market argument against peak oil--that a valid substitute is available, we just need sufficient motivation. If that turns out to be true, then I agree, eliminating subsidies will have a significant impact on demand for oil. However, I don't think that we'll find a valid substitute, but that instead we're in a total energy constrained world. Reasonable people can certainly debate that, but IF I'm correct, then governments can spend all they want to find a substitute, but that spending won't actually produce a substitute for the economy to use. Same with the export land argument. IF a valid substitute is out there, just waiting to be discovered or seized upon, then that's great, and eliminating subsidies may speed market transition to that substitute. But if there's no substitute way to keep the amount of energy available to our economy growing (as I contend), then the opportunity cost spending will still consumer energy, and largely negate any demand that is destroyed purely through elimination of the substitute.

It seems to me what you are saying is that there is no hope (subsitutes) therefore there is no hope (taking away subsidies won't help). Starting from this assumption I cannot disagree with you!

But I don't see how anyone can say there are no substitutes. Our ultimate energy constraints are the sun, gravity (the moon) and geothermal, for which there is plenty. Don't get me wrong, I also don't think we can avoid demand destruction (as is already happening). The real question is timing. Will we get time to implement substitution technologies or not before economic collapse. I would say therefore that keeping subsidies in place reduces our chances for this since oil prices will rise faster thereby risking a more rapid economic downturn.

I think you raise the key point--and something that I should have been more clear about previously. I don't think that there is no possibility of developing a true and ongoing substitute for oil to power economic growth into the future (e.g. fusion, high EROEI solar, etc.), but we need to begin a massive-scale implementation of such a project soon because the energy required to implement such an alternative is massive and may not be available for long. Even IF we accept that we currently have positive EROEI solar panels, the energy to put them in place must all be invested up front, and won't be paid back for years (how many depends on your EREOI figures). I agree with you that subsidies probably reduce our chances of developing and implementing such a plan in time. However, I think it's not necessarily a prerequisite that we get rid of subsidies to do that. What is a prerequisite--and what I think is very unlikely to happen--is for humans to suddenly start acting in a more cooperative, more far-sighted manner. One of my "laws of reality" that I'm playing around with is "any solution that requires a large group of people to behave better than they have in the past is doomed to failure." Pessimistic, sure, but supported by history (not that that's dispositive...)

Fair enough. Keep your eye on Project Better Place and other large scale developments. They are starting to happen.

One of my "laws of reality" that I'm playing around with is "any solution that requires a large group of people to behave better than they have in the past is doomed to failure."

Interesting formulation; mine is slightly different: the US lacks the unity necessary to effectively confront the converging problems of Peak Oil, global warming, and resource and environmental depletion.

Remember both these ideas are just hypotheses. There is no reason to be convinced they are absolutely true and good reasons to think they are not. While it is good to be trying to spread awareness of peak oil I don't think its very helpful to preach fatalism.

I like to think of it as preaching the importance of individual action and responsibility, rather than expecting "people" or "government" to do the heavy lifting for us. That said, it is certainly only a hypothesis (what isn't?), and I'd love to see me proven dead wrong. I'm just not holding my breath...

Oh, absolutely they are just hypotheses (your mileage may vary) and I agree with Jeff that it would be nice to be wrong. Having sat through quite a number of events that I considered decent "wakeup calls," since, oh, about 2005 or so, though, and observing very little waking up, I have to conclude that, for now, we're not capable of handling these issues effectively.

Very interesting argument, Jeff, and consistent with the "peak oil theory" as I understand it.

According to "POT," global demand is driven by global supply which, in turn, is dominated by geological factors.

Subsidies provided by various governments merely serve to shift consumption around among countries, and among various classes of consumers within countries.

Subsidies do not change consumption in the aggregate.

It is the aggregate balance of supply and demand that determines the global price.

So, yes, Jeff is quite right to argue that subsidies are not to blame for high global oil prices.

The world petroleum "pie" is being re-allocated. The USA will end up with a smaller slice. Asia will have a larger one. Some people may not like that. Oh well.

I agree with this and is somewhat related to Jerome a Paris' "Anglo Disease."

Many people around the world, especially in oil "producing" countries expect an equal share of a resource commonly owned. It is perceived as unfair not to have access because of price.

Removing subsidies won't substantially reduce consumption, but temporarily allow more consumption at a lower price for the world's wealthy.

This is a very interesting theory and definitely offers a very different viewpoint on fuel subsidies. While arguing the merits of this theory in the absence of any hard data is still a worthwhile logic exercise, I think you might still be missing the elephant in the room. The process whereby fuel subsidies are being eliminated or reduced in oil producing countries or even in net oil consumers is not to "free up" money to be redirected into other programs. My understanding is that any government that has even publicly announced that they are looking at fuel subsidies are doing it because they are out of money. They are not freeing up cash for something else, they are just trying to stay above water.

However I would also contend that this is largely an academic exercise. Any tactic aimed at demand management is going to be overwhelmed by the supply issues that are driving the market today. Demand is now 99.9% driven by available supply and related above ground issues (refining, war zones). Any supply will find a home and any regular visitor to this website likely understands that that is not going to change for the foreseeable future.

I think you make a good point that many governments that are reducing subsidies are doing so because they can't afford not to. In India and China at least, I think it's more a case that governments don't want to make the choices necessary to continue the subsidy (mainly, additional deficit spending), not that they absolutely couldn't. They just feel (rightly, I think), that higher gas prices are better for their nation than the higher inflation that additional deficit spending (necessary to continue subsidies) would bring (which brings up an interesting discussion on the comparative impact of price inflation vs. monetary inflation). I think this is because they realize exactly what I'm arguing about opportunity cost: by letting gas prices float, but controlling inflation, they're probably achieving an overall increase in GDP. They probably don't care if this increase in GDP leads to more or less oil consumption, but until we start to see convincing evidence that non-oil-intensive growth** is a worldwide trend (as opposed to just an OECD trend), the consumption of energy will only increase with continued growth until geologically constrained...

**By this, I mean the common claim that growth doesn't have to lead to increased resource consumption. In theory, sure. However, I'm not aware of any statistics that show this to actually be happening on a system-wide scale. If you just look at the US or some other developed nation, then certainly we have increased our GDP per barrel of oil consumed (though you can argue this by saying that the GDP deflator used is far too low). However, this can be explained because much of the resource & energy intensive economic activity has just moved to the developing world. To the extent that world GDP per barrel of oil consumed is greater now than in the past, I think this is due to three things: 1. Picking the low-hanging fruit. Sure, there was some obvious room for improvement in energy efficiency, but we'll continue to see diminishing marginal returns on investment in efficiency. 2. Again, underestimation of the GDP deflator used to compare present and past global production (basically, underestimating actual inflation). 3. Failure to account for externalities like pollution, deforestation, loss of topsoil, etc. that actually decrease the net global production, but aren't included in the equation.

Jeff, I was not sure what to make of your argument that subsidies make little difference to energy consumption, but after some thought I think I have got my head around it.
In classical economics it would not hold true, but that assumes demand automatically calling forth more supply, which does not hold true foe a resource constrained world.
However, as you mention this does not tell us much about how efficiently energy is used, and in places like the Gulf a great deal of waste takes place with their very low prices.

On you point about overall energy efficiency in the world as opposed to the OECD, this link indicates greatly improved efficiency in China:

The perspicacious reader will take heart from the fact that these numbers mean China's energy intensity - the efficiency whereby energy is converted into wealth - has improved by an impressive 86%, from 46,000 BTU's per dollar of GNP in 1995 to only 6,600 BTUs per dollar of GNP in 2005.


I have not checked the sources so I would take their claims with a pinch of salt, but improvement from some of the jerrybuilt coal plants etc of Communist China does not seem unlikely.

That improvement in China's GNP per BTU is very interesting. I think it can be explained in a couple of ways: 1) cultural-revolution era neighborhood iron smelters, etc., were horribly inefficient as a result of bad government policy, not as a result of the "high energy work needs to be done somewhere," and 2) China didn't have a highly monetized rural economy in 1995, but it does now. I think that the huge change in ration from '95 to '05 may have more to do with monetizing more of the economy than with using energy more efficiently for producing export goods, but who knows?

That, of course, is just my attempt to explain away the figure. More likely that the figure is close to reality and I'm just wrong in my assumption. I do think, however, that it supports another of my points--that the improvements on BTU/$ GNP will exhibit diminishing marginal return on investment. The ratio declined by a factor of 7 from '95 to '05. I doubt it will decline by that same factor from '05 to '15--that would require only 1,000 BTUs per $ of GNP... as a result, we'll start to hit the long, flat part of the diminishing marginal return curve and it will become increasingly difficult to improve on the energy efficiency of our economies as we naturally take the easiest steps to improve efficiency first.

And, back to my main topic: eliminating subsidies will help to take steps to improve the energy efficiency of our economies, but it won't do anything about the diminishing marginal returns problem...

At some point and very theoretically then you are going to hit diminishing returns, but it seems a long way off to me.
Energy savings have just been unimportant in our society for many years.
Just the decrease in use from America compared to Japan is huge, and Japan is not even trying - look at the degree of night-time illumination, for starters.
In Britain heating houses with half-way decent insulation should be pretty unnecessary, and all the office lights blaze all night.
Not to mention that most consumption is not needed - God! I sound like some sort of long-haired hippy! :-)
We are also not actually short of energy resources, with substantial although not infinite supplies of coal, and EROI for solar always seems to be done for silicon, when this film technologies of all sorts take a fraction of the energy.
Nuclear energy if the daft Storm and Smith figures are discounted has a very good EROI, and with the slightest attention to fuel cycles that can be improved by 50.
We do have to get our beloved leaders to get on and do something other than mount invasions though! ;-)

Elimination of subsidies is not a magic bullet but we need every bit of ammunition we can find to wind back oil consumption.Yes, subsidies are difficult to eliminate politically.In Queensland,Australia where I live there is an 8 cents/litre fuel subsidy which had it's origins in a change in the federal tax regime several years ago.There is still no sign of the state government abolishing it.In fact,they want to fine tune it so that only holders of QLD drivers licences can claim it.This is in a prosperous country currently experiencing a resources boom.

In poorer countries the result of increasing fuel prices,let alone reduction in subsidies,is all sorts of murder and mayhem.Even in "civilized" Europe there are the beginnings of civil disobedience.

While most countries have management style leadership who are largely reactive,not proactive,I can't see much being done until the SHTF and by then it is too late.

Re China and India.Both countries have made a huge mistake in trying to industrialize in the way they are doing.They are just repeating the mistakes of the industrial revolution in the West.Look at where it has gotten us.
Both countries have a huge and intractable population problem.Food is going to be the big issue,not mini cars for the masses.China has massive environmental damage which will reduce their home grown food supply.China also has large ethnic minorities many of whom are none too fond of the Chinese and for good reason.
Both China and India are just basket cases waiting to happen in my opinion.What the collateral damage to the rest of the world will be as a result of a generalized collapse in these countries is anybody's guess.

I have defended subsidies for ethanol for some time here in many posts, but I never thought subsidies would be defended by Jeff Vail or any one else for that matter. If oil subsidies are to be defended it pulls the rug out from the anti subsidy argument against ethanol.

Now it if I can just convince everyone that the EROEI for imported oil from the point of view of the importing country is minus 1 or in other words all the energy of imported oil is consumed and there is no energy gain.

In addition, it would be nice if it would be recognized that blending the EROEI of imported oil and domestic oil is wrong. Furthermore assigning the EROEI of domestic oil to all oil consumed makes a double wrong since the EROEI of imported oil which is over 50% of consumption reduces EROEI of all oil by at least 50%.

By the way a new subsidy for gas has come about in Iowa and many other states since the price of gas reached $4. In Iowa the state and local sales tax is generally about 7%. With a state gas tax fixed at 20 cents/gal., there is now a de facto subsidy for gas since the tax on gas is less than other purchases (except food). The sales tax on a $4 clothes item would be 28 cents for example. When gas is taxed less than other things it subsidizes consumption.

I guess I should clarify: my intent is not to defend subsidies--I think they're economically wasteful--but rather to suggest that eliminating subsidies is not a magic bullet to destroy demand and bring prices down. As I noted above, this article tries to take an extreme position (though some comments have pointed out that, as a result, it ends up being a bit of a straw man, as the articles that suggest eliminating subsidies will help don't actually suggest that eliminating a 30% subsidy will reduce demand 30%). That extreme position is that eliminating subsidies is, essentially, worthless. I don't actually think that, but I do think that taking and attempting to defend a position slightly more extreme than I actually believe is a good way to develop arguments. What I DO think: the media has been overplaying the potential benefit of eliminating subsidies; eliminating subsidies will be economically beneficial in the long run, but I doubt it will have a significant long-term impact on the supply-demand picture; we should do it when the opportunity presents itself, but given that we have a limited amount of political capital to throw around, we should focus on areas where we can potentially have a real impact.

Removing fuel subsidies is in my opinion simply removing obstacles that keep the markets functioning correctly. With subsidies, the government favors high fuel consuming technology, infrastructure, culture, and city planning. Removing subsidies is not going to change these immediately and some things like changing a city layout will not happen overnight but during the next centuries. It just does not happen at all if there are subsidies on fuel.

I do not see a point in searching for weak feedback loops where the dominating effects are direct.

About Europe: consumption in Europe is not lower because of the culture, it's the other way around: the culture is different because of higher price of gas causing consumption to be lower.

Having a high tax on oil/gas is almost like the local government owning a portion of the oil producing well, and it is able to insert that income from the virtual part of the well into the economy, where part of that income will be used to for example explore alternative energy. This way a high tax is a win-win for a country.

I was right there with you until you said that "the culture [in Europe] is different because of higher price of gas causing consumption to be lower." Have you been to Europe? Have you been to America? Have you lived for any period of time in both? Do you have a decent understanding of the history of the two? I find it hard to believe that anyone who can answer yes to all of those questions can make that statement other than in jest.

That said, I don't disagree that a high fuel tax *can* be a win-win for a country (all depends on how the revenue is spent).

I'm not sure if I can answer yes to all of your questions in a confident enough degree that you would consider my opinion to be well grounded. I live in Europe, only have visited USA occasionally, and it's difficult to assess my knowledge of history. Still, I cannot believe the people are any different and would behave in any way differently if they were facing the same economical situations, whatever the culture.

The price difference of the gas on these continents is not only the nominal difference in a currency, but a portion of the income. Post-war Europe has not seen such prosperity that US has, and that makes gas relatively even more expensive.

But then again this is too complex, the cities have been populated for hundreds or thousands of years longer here and population density is a lot higher on average, so that speaks against my opinion. Thanks for you comments.

I can't believe this discussion is even being made.

Fuel subsidies in countries that do not export oil are the most insidiously insane thing ever devised. Fuel subsidies in countries that do export oil are not as shortsighted, but they still remain hypocritical. Lunacy on all counts. Horrible argument made by this piece, and politically it would not stand up at all to scrutiny, quite the opposite in fact.

To say it won't solve anything, when time is what the world needs the most at the moment, and reducing subsidies would do just that is neither logical nor sane. To think for a moment that individuals driving around in hummers, an endpoint of fuel subsidies, is somehow positive, is extremely short sighted.

yes its positive, for about 3 or 4 years. Then what?

I think this piece is a classic case of TOD not being able to think two steps infront of itself. Perhaps your ideas can find ways to magically produce a million tons of grain for this winter.

If Fuel subsidies are not an issue, then U.S Farm Subsidies aren't either, in fact, U.S Farm subsidies should be raised to a level matching that of Oil Exporters. Maybe they can find 'magical' ways to eat tar. I just love the hypocrisy here.

This must be a piece to see if anyone is really listening to what is being said here.

To say it won't solve anything, when time is what the world needs the most at the moment, and reducing subsidies would do just that is neither logical nor sane. To think for a moment that individuals driving around in hummers, an endpoint of fuel subsidies, is somehow positive, is extremely short sighted.

yes its positive, for about 3 or 4 years. Then what?

I think you completely missed the point of this piece, which was simply advocating reducing fuel subsidies is not going to solve things or be practical to the extent most people might believe. There was no reference to fuel subsidies or hummers being a "positive" thing, don't skim so badly please. You have to read the whole article...

From the article you obviously didn't read:

To conclude, I’m certainly not advocating the maintenance or increase of existing fuel subsidies. They are an inefficient allocation of resources, resulting in less economic activity for every barrel of oil consumed. Rather, my intent here is only to dispel the notion—increasingly popular of late—that eliminating fuel subsidies is some kind of magic bullet to derail the demand train.


I think this piece is a classic case of TOD not being able to think two steps infront of itself.

TheOilDrum Has, Is and Will continue to be one of the most forward-thinking places of discussion on the internet, saying that it is classic for theoildrum to be shortsided displays profound ignorance. TheOilDrum was discussing the problems with the food supply you speak of years ago, ever read Stuart Staniford's Fermenting the Food supply or the numerous other articles on the subject, this place is full of prophets with prophecies that are coming true everyday.

Last of all Jeff Vail, more than anyone on theoildrum IMO is more onto solving and understanding the key problems our society faces. His work on Rhizome networks and organization is absolutely brilliant, and he happens to understand the root problems behind our oil and food problems, like growth and hierarchy, instead of forever in an infinite regression, running faster to stay in place, with "solutions" such as "alternative energy."

Really, what are you getting at?

Hmm. Perhaps you could read Jeff's piece again, more slowly. He says that subsidies are a stupid idea. His insight is that removing them won't have the expected effect, that of significantly reducing demand.

Jeff has seen that this is an issue in which "policy resistance" will dominate. What's policy resistance? You try to push a system one way, and it pushes back. Sometimes it bites back, too. You don't get what you wanted, and you often end up with unintended effects. There are countless examples in the history of health policy, criminal law, education policy, and economics.

An energy-related example of policy resistance is the US ethanol-from-maize (corn) subsidy. That policy is not significantly reducing US dependence on imported oil, as intended, but it is increasing world food prices and so causing widespread malnourishment. (I *hope* that consequence was unintended.)

Jeff's piece says, in effect, that developing-world governments (and the rest of the world) are wearing diving weights in quicksand. And that's true. Subsidies, speculators, exchange rates, OPEC recalcitrance, ANWR, tar sands and coal-to-liquids -- these are all straws for drowning men to clutch at.

Further thoughts on elasticity of demand: In China, a lot of diesel is burnt in stationary electricity generators, owned and operated by factories because the grid is so unreliable. A lot more fuel is burnt in goods transport by road. These demands are a lot less elastic than in the US or Europe, because there are fewer substitutes. They can't use the grid for electricity because a failure in the middle of a production run means throwing out the whole batch. They can't use the rail network for transport, because there isn't one. Industrial demand will continue pretty much as it is, until variable costs exceed sale price. Then it will collapse.

The point of this is, just as there is more than one kind of oil (and there is plenty of the kind people don't want - just ask Algeria or Iran), there is more than one kind of demand. Simplified analysis will lead you astray.

Farm subsidies are more pernicious than most.

All subsidies benefit the largest players most. However, it was shown many years ago that small farms are more productive than large ones - up to twice as productive per acre.

Agriculture is one area in which removing subsidies may have the expected effect, by slowing or even reversing the consolidation trend.

Ok, perhaps you need to think about subsidies this way.

Subsidies in Oil exporting countries are the RESULT of plentiful amounts of capital available to the government. The argument that reducing subsidies would allow for even more economic growth is a strawman- the countries with subsidies have one thing in common: Lots of money and no real way in which to spend it. The result is fuel subsidies. This is a simple logical step in seeing the problem.

Of course, what is the solution? So you reduce subsidies, and the government ends up with even more capital in which to spend, creating the same effect as fuel subsidies to begin with. There is no solution to this problem in the context provided. There has to be another means to reduce consumption.

IMO the only ways are massive tax increases in the use of Fuel (European model) or a more Globally interdependent network of nations. Subsidize fuel? We'll subsidize Food and make ethanol. Subsidize electricity? We'll subsidize computers. Don't want to participate in a global economy? We'll subsidize Arms sales to your enemies. Want to play real hard ball? Well we can go there.

This argument will have to made on a case by case basis. The hypocrisy, and what is just completely unbelievable to read on the part of intellectuals no less, is the notion that subsidies in China for instance are a moot point and that nothing can be done about them. Quite the opposite, subsidized fuel has allowed them to completely destroy the natural ecology. The same will soon be said of India. To allow other nations that subsidize fuel and oil usage to do the same is quite unbelievable. Its insane to think subsidies are anything but shortsighted. Extremely shortsighted.

The reason nations do it is economic inexperience. They just don't know anybetter. And when their resource runs out? Or worse, when their export livelihood dries up? C'mon people, you can't possibly think this has any beneficial outcome in the longrun. I can't even believe I read this here just now, and from members who should know better.

Subsidies are the energy equivalent of unprotected sex.

Subsidies are in place on developing countries. these are not families with disposable income to absorb ~30% increases to their budget. hunger is already a problem in many subsidized countries and governments are only going to remove or lower their GDP spend because they have to. This will not be a choice buy them to help the market or other countries, they are not going to do it so their public can learn to break their dependance for a hope of a oil free future. they will do it because of priorities.

dont forget to look at where hunger in the food shortage is worst when you list countries with fuel subsidies.
a taxi driver in jakarta will not survive as well as one in new york as prices raise for whatever reason as his customers do not have nearly the same disposable income.

i do agree with comments that countries will opt to subsidize particular streams like farming, military, trucking. as without it in a world with crude moving ever upwards - their economies would harshly grind to a halt. id say some would condition their use of subsidie to their move away from oil in the future.

and i agree that removal of subsidie will not proportionally remove demand, you have requirements of its use no matter what. general public might take the largest shift in demand but commerce and industry have no choice except to trend away from oil. commerce will get kicked in the pants from the publics change of direction as well. we already see this in developed countries with the raising prices and inflation. instant large changes in undeveloped countries would be catastrophic. and its with this that i think it would be a slow move away which would not make large demand changes, and fast subsidies cuts would only be forced, not choosen.

i agree with articles i have read elsewhere that this will be a bumpy ride with prices going up. we will see a cycle of demand distruction as countries around the world reach their threasholds. the price settles or drops, demand or shortages catch up again (from population growth, breather in price bringing hope, redirction of freed oil from one country spurring growth in another, increasing output decline) and then its off again.

i have worked out for my financial sitation i could handle $10AU/Litre and still drive to work, but i know this is isolate to driving only and WAY before this was reached my work place would be out of business, id have troubles finding a job, food and goods would cost way too much and etc. so the cut out point would be well before my budget for pumping petrol into my car. $4-$6AU/L would be the cut out for collapse. but in contexts of this thread, my disposal income is MASSIVELY higher than an average worker in a subsidized country due to the undeveloped nature of an unskilled labour force, average income and % expenditure on food,rent,loan,goods,kids. i feel Europe, USA and Australias public will be able to withstand price increases until a full ecomonic collapse of industry (ie ALL living costs together wiil reach a break point for consumers, not just petrol itself). But for these subsidized countries, the % spend on fuel (or food and fuel) for the consumers will quicky be the first facture point that would lead to all our failure of the countries ability to function. businesses there will follow the lead i feel they will function longer with exports and cheap labour etc.

developed countries would likely degenerate into consumers only spending on food and fuel before a all out collapse. tho it would very rough getting there, we have many areas to contract on first, and failover to unskill labour industry for export and internal restructure.

anyhow, in a nutshell countries will fall in an order with the unstoppable raise in price. i think we might under estimate the collapse of some through just the basic subsidie of fuel due to the consumers not being economicaly sound as others.

rabble rabble

Even if we could say that eliminating subsidies would result in cheaper oil for US, it obviously won't result in cheaper oil for the nation that just removed the subsidies.

We would like the Chinese to remove their subsidies so WE can have cheaper oil.
Why would they do this?

From a geopolitical point of view, the ideal situation for the Chinese is cheap oil in China (so their economy can grow, lifting millions out of poverty) combined with EXPENSIVE oil in the west, to create demand destruction HERE (carpooling, cycling, motorbikes, living closer to work etc) to free up more oil for the growing needs of the 3 billion poor people in asia.

If I was sitting in Beijing, I would be trying to lock up as much oil from Africa and Iran as possible on long-term off market contracts, while using my huge currency reserves to subsidise relatively oil in China over the next 20 years, while looking for alternatives, and, here is the clever part, doing EVERYTHING I COULD do drive prices in the west UP in order to spur creation of alternatives by all those clever engineers in Silicon Valley.

Why would I want to cut subsidies?

When oil in Saudi Arabia cost $8 per barrel to produce, selling gas for $0.75 per gallon is not a subsidy!

The national oil companies simply chose to sell the refined product at a low or no profit margin to domestic users. The purpose of national oil companies is to first serve the needs of the domestic population and not to make a huge profit off sales to citizens and residents of said country.

I disagree with your assessment of subsidies for most of the exporting nations (except Venezuela which sells below cost). The leaders of these oil exporting countries are only treating the population fairly in not making a "killing" from selling a domestic resource. Let the importing countries pay a premium for this resource. Selling gas for $0.75 per gallon when the cost for the oil is $0.20 per gallon is only fair treatment of the domestic population.

do you know if saudi arabia refine their own oil to gas? oil doesnt magically turn into petrol and theres many types of refineries for different types of oil.saudi has many fields with many types of oil. so they might be exporting all oil and importing 'gas' and subsidizing it.

not trying to insult, just i dont think its as simple as that.

tho yeah, they get so much off it there isnt much difference in the redirection of cash flow to provide that cheaper product. but physically i bet most leaves the country. anyone here know details?

Effective subsidy is calculated against the opportunity cost (selling the oil on the open market), not the cost to produce.

"removing subsidies may cause demand to increase more quickly"

What a brilliant insight! Clearly what governments need to do is increase subsidies, to reduce demand. In fact, if gasoline was given away free, demand would probably drop to zero.

Having got the nature of growth and hierarchy completely wrong, Jeff Vail's name on an article seems to be a byword for "major logic failure".

if gasoline was given away free, demand would probably drop to zero.

There really isn't a clearer or more succinct way of refuting the argument than this. Jeff's argument doesn't seem to bear any clear relation to reality.

Hi Bob,

It's a bit humorous when you use such faulty logic to criticize another's logic. I say that "removing subsidies may cause demand to increase more quickly," and you assume (incorrectly) that means I'm also arguing that the converse is true, that "increasing subsidies will cause demand to decrease." That's your first logic error. Then, you extrapolate from that logically faulty foundation to set up what is called a "straw man argument" that only makes you look ignorant.

You should get a dictionary and look up "syllogism." When you understand why this is logically correct: "All men are mortal, Bob is a man, therefore Bob is mortal," but this is NOT logically correct: "All men are mortal, Bob is a mortal, therefore Bob is a man" you might be on the path to understanding the errors in your argument. But there I go getting optimistic again :)

I say that "removing subsidies may cause demand to increase more quickly," and you assume (incorrectly) that means I'm also arguing that the converse is true, that "increasing subsidies will cause demand to decrease."

Hmmm, ok, so putting subsides up increases demand, and putting them down also increases demand? Just like petrol prices coming down in the US increases demand and prices going up also increases demand? If you can show that this actually happens I'll be impressed.

I cannot agree with the statement that a 30% cut in subsidy cannot ever cut usage 30%. In theory it could be more than 30% if the money saved from govt budgets was allocated to expanding rail, cheap (free?) tickets, give every resident a bike, build bike paths etc then theoretically the budget could be better off and the new distortions to the free market would result in >30% reduction in fuel usage (or do fat bums and dumb administration make this an impossibility? (can always hope)

I live in Europe and totally disagree with the idea that culture is what causes the difference in consumption, or at least efficiency. This is obviously not true as during the last 10 years of uninterrupted growth, where purchasing power has been rising faster than the price of petrol, the trend has been towards larger and larger cars, copying the US model. If petrol cost half what it currently does, I have absolutely no doubt that our cars would be even larger and less efficient than they have become.

If you think of the argument from a different perspective, if the price of petrol doubled in the US tomorrow, what percentage of driving activity would then be priced out? What percentage of non-essential trips by petrol consumers would not take place? I would suggest that this could be quite a lot.

You also suggest that by ending subsides, the governments would free up up to 3% of GDP which would then go to stimulate the economy. I don't really see how this would work, as someone has to be paying for the oil. Instead of the government paying for it through aggregate taxes, the consumer would have to pay for it directly to the oil producer. How can there be a net gain from this scenario to the economy without a fall in demand, i.e. a real reduction in oil consumption?

Also, it is not obvious, even if this were true, that a 1% growth in the economy will result in an increase in oil consumption of 1%. Individual consumers may choose to use some other energy source such as wind, solar, nuclear or coal, delivered to them as electricity rather than a liquid fuel for instance. While you point out that the relationship between oil price and demand is not linear, is it not likely that at some price the reduction in demand will be much larger than the marginal increase in price? Some price will be the straw that breaks the camels back, but the signal would be muted if that price is subsidized.

I vaguely remember reading an article 25 years ago that estimated short-term price eleasticity of demand at around 0.1 and long term around 1. I googled the subject and found this interesting article:


I find the article interesting because it explains clearly the method used to estimate the price elasticity of demand.

In summary:

Understanding the sensitivity of gasoline demand to changes in prices and income has important implications for policies related to climate change, optimal taxation and national security. The short-run price and income elasticities of gasoline demand in the United States during the 1970s and 1980s have been studied extensively. However, transportation analysts have hypothesized that
behavioral and structural factors over the past several decades have changed the responsiveness of U.S. consumers to changes in gasoline prices. We compare the price and income elasticities of gasoline demand in two periods of similarly high prices from 1975 to 1980 and 2001 to 2006. The short-run price elasticities differ considerably: and range from -0.034 to -0.077 during 2001 to 2006, versus -
0.21 to -0.34 for 1975 to 1980. The estimated short-run income elasticities range from 0.21 to 0.75 and when estimated with the same models are not significantly different between the two periods.