Subsidies: a big culprit in high gas prices

In China, the government caps gas prices. Drivers there pay about half of what Americans pay. In many countries, oil prices are held artificially low, either by fiat or subsidy. The result? Consumption keeps rising, boosting global prices. The rest of the world – the part now racing to conserve – ends up paying more than it should.

Unfair?

Yes, say global actors such as the International Monetary Fund (IMF), which is calling on governments to let consumers face market prices in order to kick-start conservation and reduce official spending.

About half of humanity, from India to Chile, now benefits from cut-rate petroleum prices. In 2008, these countries will account for all the growth in world oil demand, or an additional one million barrels a day, according to Deutsche Bank. Their consumption will be the highest in eight years.

And these subsidies will cost as much as $100 billion in 2008, or twice as much as last year, estimates the International Energy Agency. That would be money better spent on reducing oil use – what's called "demand erosion" – than encouraging it. And sadly, it is the rich who benefit the most. The IMF says the top one-fifth of households in income receive 42 percent of fuel subsidies because they are the heaviest users.

Shielding consumers from the real costs of an oil-based economy only makes it more difficult for them to face the coming end of the oil era.

For wealthier nations that generally shun subsidies, the price of oil – still over $130 a barrel – is quickly altering lifestyles.

As onerous as it is for Americans to bear $4-a-gallon gasoline, the results are encouraging. Mass transit use is way up and oil demand is falling. For the first time since 1979, the number of miles driven has dropped. And General Motors is weighing an end to production of the Hummer as buyers flee such gas-guzzling vehicles.

A few nations that do subsidize fuel are feeling the financial pinch on budgets and moving to reduce subsidies or end price caps, despite street protests against such moves. Most of them are in Asia, the region that will account for 70 percent of the increase in oil demand this year.

In China, oil demand is estimated to rise 5 to 10 percent this year, but the government has resisted calls to end price controls. A few other countries – Chile and South Korea – are now moving toward subsidies to appease political pressures.

The biggest culprits are oil exporting nations, especially in the Gulf. They continue to throw petrodollars at both fuel subsidies and big projects that consume oil.

In Europe, political pressures are building to reduce fuel taxes, similar to a call by John McCain to suspend the federal gas tax for the summer. Such moves would be a mistake. Fuel taxes help send the right price signals for conserving oil as well as reducing greenhouse gases that cause climate change.

In Congress, bills to combat global warming would raise costs for oil users, even possibly adding a dollar to gasoline prices. But proposals by lawmakers to relieve those costs with subsidies to consumers would only defeat the purpose of reducing oil demand.

Governments that try to create a false economy for oil are not revealing the truth to their people.