IEA Urges Swift End to Energy Subsidies

Oil importing countries need to remove energy subsidies as quickly as possible as they are a spur to higher consumption despite high oil prices, the International Energy Agency has warned.

“The oil market is not functioning well because there is not significant demand response to price signals,” Claude Mandil, IEA executive director, said in an interview with the Financial Times.
Oil importing countries need to remove energy subsidies as quickly as possible as they are a spur to higher consumption despite high oil prices, the International Energy Agency has warned.

“The oil market is not functioning well because there is not significant demand response to price signals,” Claude Mandil, IEA executive director, said in an interview with the Financial Times.

Developing Asian countries such as China, Indonesia and Malaysia have reduced their fuel subsidies in the past weeks, increasing petrol and diesel prices by 6-30 per cent. But the region is still on track to account for 40 per cent of the increase in global oil demand this year.

Mr Mandil said the IEA, the industrialised nations’ energy watchdog, was “fully conscious that many of those subsidies are made for social purposes”. But those problems “should be addressed by other ways”.

In spite of strong economic growth, Mr Mandil said, high oil prices hurt. “It is true that [in very advanced] countries the burden is not extremely high, but in most developing countries the burden is important.”

The IEA warning came as US oil prices hit $57,70 a barrel, up 65 per cent from April last year. Demand is set to increase this year by about 2m barrels a day, well above the historical trend.

The price spike has forced the Organisation of the Petroleum Exporting Countries (Opec) to reconsider an increase of its production ceiling of 500,000 b/d. Mr Mandil warned “each subsidy distorts the market [and] gives the wrong signal as commodities seem less expensive than they are”.

The Paris-based IEA has emphasised energy saving in the past months and will publish a study Saving Oil in a Hurry which will propose reductions in transport fuel demand.

Mr Mandil said the new study, to be released during the IEA’s annual meeting, would not signal a change in the collective emergency policy response of the body, but would establish “a set of recipes to how best implement demand restraint measures” that IEA member countries could use individually.

Mr Mandil said that IEA would still study each supply disruption case by case to decide how best to respond. But he added that “some countries may be willing to have demand restraint measures even without supply disruption”.

“We think that the time has come to launch adequate energy efficiency programmes and policies in consuming countries to help market forces react to high prices signals.”

Financial Times