Keeping oil prices high with wasteful subsidies

It is not too surprising that oil prices in the United States have retreated from the lofty highs of more than $140 a barrel reached in July. Energy consumption is falling across the industrial world.

Americans, the world’s most avid gas guzzlers, finally responded to higher prices. They drove about 10 billion miles less in May than they did in the same month last year. They are trading in their SUVs for more sensible vehicles. As oil prices rose by two-thirds, American oil consumption fell by 900,000 barrels a day between the first quarter of 2007 and the same period of 2008.


Unfortunately, a large share of the world’s population is not responding to high energy prices. Across the developing world, governments are subsidizing energy, blunting the incentive to conserve by keeping prices low. They are absorbing the savings made by industrial countries and helping to raise oil prices by stoking demand.

In China, demand rose by 400,000 barrels a day between the first quarter of 2007 and the same period of 2008. Demand in the industrialized nations in the Organization for Economic Cooperation and Development fell by one million barrels a day over the same period. In the rest of the world, it grew by 1.1 million barrels.

Developing countries are growing faster than rich nations, of course. But experts say that government subsidies are exacerbating their unquenchable thirst for oil. China is expected to spend about $40 billion this year in subsidies. Venezuela and Egypt are forecast to spend more than 5 percent of their total economic output on subsidies this year.

IHT