Adjusting to Low Prices
December 21, 2015
In many of the world’s large oil-producing and consuming countries, the government subsidizes the consumption of fossil fuels—particularly petroleum products used for cooking, driving, and heating. These subsidies can be costly when oil prices are high because the governments bear the cost of selling these fuels to their populations at below-market levels. These consumer-oriented subsidies also have a market-distorting and economic effect—driving increased consumption of the subsidized products and leading the domestic economy to invest further in industries that rely on artificially cheap fuels. Most importantly the subsidies are usually an inefficient way of providing economic support to a given country’s population—a main goal of their existence.
While in the past the international community has joined in a variety of forums to encourage fossil-fuel subsidy reform during a time of high oil prices—when the burden on governments is the heaviest—today’s low oil price environment may very well be a more viable time to pursue this pathway of reform. The impetus for reform may increase, especially if oil prices stay around their current low price threshold for an extended period, thus putting increased financial pressure on governments that rely on oil export revenue to fund government activity.