Energy subsidies issue is heating up
Published: Jul 4, 2010 00:54 Updated: Jul 4, 2010 00:54
The issue of energy subsidies is heating up. The cards are out, positions are being redefined and bargaining is in process. A concerted effort is on to get this anomaly to the maximum possible and the issue was mentioned at the just-concluded G20 summit in Toronto too.
The final communiqué at the end of the G20 summit here in Toronto not only noted with appreciation the report on energy subsidies from the International Energy Agency, OPEC, OECD and the World Bank combined, but also welcomed the work of the finance and energy ministers "in delivering implementation strategies and timeframes, based on national circumstances, for the rationalization and phase out - over the medium term - of inefficient fossil fuel subsidies that encourages wasteful consumption, taking into account vulnerable groups and their development needs." The IEA, OPEC and the World Bank report on fossil fuel subsidies was prepared at the request of the previous G20 summit in Pittsburgh.
The G20 also encouraged, "full implementation of country-specific strategies," and insisted on continuing to "review progress toward this commitment at upcoming summits."
This "first exhaustive study of the financial assistance devoted to oil, natural gas and coal consumption" reported countries spend more than $550 billion in energy subsidies a year, about 75 percent more than previously thought. It emphasized that phasing out subsidies over the medium term, as agreed last year by the G20, would trigger vast savings in energy consumption and carbon dioxide emissions.
As per the report, in 2008 alone - the latest year for which data is available - 37 large developing countries spent about $557bn in energy subsidies. This represented a big increase from $342bn in 2007. The IEA says the 37 countries surveyed for the report, spent on average about 2.1 percent of their GDP on energy subsidies. Iran, Russia, Saudi Arabia, India and China were among the top countries spending on energy subsidies.
Fatih Birol, the chief economist at the IEA, believes removing subsidies was a policy that could change the energy game "quickly and substantially."
The IEA estimated that energy consumption could be reduced by 850 million tons equivalent of oil - or the combined current consumption of Japan, South Korea, Australia and New Zealand - if the subsidies are phased out between now and 2020. The consumption cut would save the equivalent of the current carbon dioxide emissions of Germany, France, the UK, Italy and Spain. Subsidy critics say they encourage wasteful consumption, reduce global energy security, impede investment in clean energy sources and undermine efforts to deal with the threat of climate change.
They also claim that subsidies are a burden to national budgets, with spending on financial support to oil, natural gas and coal at times larger than education or health spending.
Interestingly Saudi Arabia is on the list of the countries that spend most on subsidies. Indeed Saudi Arabia can boast being a country with the cheapest petrol on earth and plays a definite role in keeping oil prices low for common consumers on the street. Riyadh has reasons for this, as it is one way of sharing the Kingdom's energy resources with the common masses — a considerable number of whom are definitely poor.
Then there are also economic reasons for keeping fuel prices low in the country. Low fuel prices keep inflation under tab. If petrol prices go up then inflation increases, something that affects the common masses as it does in other parts of the world. This is a social issue and cannot and should not be overlooked altogether.
Yet one cannot deny fuel subsidies promote wastefulness and there are manifestations of it in society everywhere, something one cannot deny. Indeed, with public transport lacking in the real sense, people tend to depend on private vehicles, gas-guzzlers, something that is contributing to the skyrocketing demand pattern.
The Kingdom has also been increasingly burning crude oil to generate power, particularly in the summer months. The IEA classifies "direct crude" burnt for power generation in an oil category it calls "other products." Saudi consumption of other products rose by 58.7 percent last year, the agency noted.
According to revealed data, total Saudi domestic energy demand is expected to rise from about 3.4 million barrels per day of oil equivalent in 2009 to approximately 8.3 million barrels per day of oil equivalent by 2028 - a growth of almost 250 percent. Saudi Arabia has emerged as the second-biggest source of global oil demand growth after China.
This growing Saudi consumption is a cause of concern - conceded, highlighted and acknowledged by none other than Khalid Al-Falih - the czar of Saudi oil. This is a real challenge to planners here in Riyadh. Many in IEA strongly underline that subsidies promote wastefulness. It encourages inefficiencies too. Al-Falih acknowledges this warning that unless Saudi Arabia tackles inefficiencies in the way it uses energy, the Kingdom's availability of crude to export risks falling by as much as 3 million barrels by 2028 to 7 million barrels a day.
But supporters, including some G20 members, who reluctantly signed the statement last year such as India, say subsidies are needed to help poor people in developing countries and control inflation.
The issue is a divisive one. It exhorts emotions. It has it pros and cons. Inefficiency needs to be tackled. Wastefulness cannot and should not be encouraged yet social aspect could not be overlooked. This is imperative too.
The G20 has finally felt the need; allowing member countries to take into account "the national circumstances, needs of vulnerable groups and the development needs of the societies." The road to success is through compromise and bargaining only. One needs to strive for a middle point accommodating both views; one cannot help underlining at this stage.
