Monday, July 28, 2008

There Will Be Subsidies

An interesting report from the Times' Keith Bradsher on oil subsidies in developing countries:
From Mexico to India to China, governments fearful of inflation and street protests are heavily subsidizing energy prices, particularly for diesel fuel. But the subsidies — estimated at $40 billion this year in China alone — are also removing much of the incentive to conserve fuel.

The oil company BP, known for thorough statistical analysis of energy markets, estimates that countries with subsidies accounted for 96 percent of the world’s increase in oil use last year — growth that has helped drive prices to record levels.

The subsidies prevent the price mechanism from working in a significant part of what is a global market, therefore the adjustments of price and quantity demanded must be larger elsewhere.

I would suspect that policymakers in these countries realize these subsidies are bad policies - indeed, the article describes how many countries are raising prices, but their price increases are falling short of the increase in world prices, so the costs to the governments are nonetheless increasing, even as citizens protest higher prices.

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