Subsidies drive up cost of oil

NY Times:


To understand why fuel prices in the United States have soared over the last year, it helps to talk to the captain of a battered wooden freighter here.

He pays just $2.30 a gallon for diesel, the same price Indonesian motorists pay for regular gasoline. His vessel burns diesel by the barrel, so when the government prepared for a limited price increase this spring, he took to the streets to protest.

“If the government increases the price of fuel any more, my business will collapse totally,” said the boat captain, Sinar, who like many Indonesians uses only one name.

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.

In most countries that do not subsidize fuel, high prices have caused oil demand to stagnate or fall, as economic theory says they should. But in countries with subsidies, demand is still rising steeply, threatening to outstrip the growth in global supplies.

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Subsidies for fuel are costing these governments so much that they will eventually not be able to maintain them. Iran is already killing its economy with its subsidies. Other countries will have teh same problem, but in the meantime we are all paying the price for the increased use that the subsidies have engendered.

What is clear is that the demand for fuel is outside the control of the Democrats in Congress and they cannot blame the price on evil speculators. We need to exploit our domestic resources so that we are not transferring wealth to others some of whom are subsidizing the use of fuel in their own country with the higher prices paid by Americans.

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