A global campaign to abolish fossil fuel subsidies, driven by the World Bank, the International Energy Agency and the International Monetary Fund, is gathering pace.
On Jan. 1, alone, both Morocco and Indonesia abolished diesel subsidies, following Malaysia in December and India the month before that.
That is fairly remarkable, given that the history of subsidy reform is not always happy, with powerful vested interests, and the scope for public opposition if handled badly.
Impacts on fuel poverty have to be avoided. Reform has to be planned. In a sign of doing just that, Egypt is presently saying that it is “considering” fuel subsidy cuts in the next fiscal year, as it tests the water.
Scrapping of subsidies could have significant impacts, in energy markets and more widely. In oil markets, it may delay re-balancing of demand and supply after the price crash. Clean energy may benefit. And reforms may help the balance sheet of oil exporters suffering from lower prices.
The World Bank, IEA and IMF say that falling oil prices are an opportunity. It seems the message is being heard.
Countries were already taking action before the crash. In April last year, Iran significantly increased prices for gasoline, diesel and compressed natural gas. Russia last year postponed a long-run annual increase in natural gas prices, but it should re-start those annual price rises this year.
What is remarkable is that so many significant, reform-minded countries are now taking action, suggesting more could follow.
Here is a quick resume of some bigger subsidy reforms since the oil crash:
- India – October 2014; abolished diesel subsidies; raised natural gas prices; now plans some further, small structural reductions in fossil fuel subsidies in next week’s budget
- Malaysia – December 2014; abolished gasoline and diesel subsidies
- Indonesia – Jan. 1 2015; abolished gasoline and diesel subsidies which had cost the country $19.6 billion in 2014
- Morocco – Jan. 1 2015; abolished diesel subsidies
- Egypt – recently announced plans to reduce fuel subsidies by $2.6 billion in the next fiscal yeay
According to the IEA, India is the third biggest subsidiser of fossil fuels; Egypt is the sixth biggest; and Indonesia the seventh. See the chart below, taken from the IEA’s World Energy Outlook 2014.
Most subsidy cuts are for oil products; what chance that countries may also take action on gas, where prices have also fallen? And could the big oil exporters join in: Saudi Arabia, Venezuela and UAE?
The main type of fossil fuel subsidy is price support: countries reduce energy prices below their market cost, to make it cheaper for consumers.
The problems with fossil fuel subsidies are well known. They drive wasteful consumption (because the make energy prices artificially low) and black market smuggling (to countries with higher, unsubsidized prices). They deter private investment. They use up valuable fossil fuel resources and exports; disproportionally benefit the rich; they are a disincentive to invest in efficiency and clean energy; and they increase carbon emissions and local pollution (for example ozone and NOX from burning cheap gasoline). Finally, they are a big drain on government budgets.
In its latest World Energy Outlook, published last November, the International Energy Agency calculated price subsidies for fossil fuels at $548 billion in 2013. That was a slight drop from the year before, making the first annual fall since 2009, the last time there was an oil crash. It is a safe bet that subsidies will be lower in 2014.