That
gasoline subsidy!
Port Spain
Petroleumworldtt.com
11 04 07
Oil prices continue to soar reaching US$90.00/barrel
in recent weeks against the background of fears
of supply disruption as a result of military tensions
around the Northern Iraq/Turkey. Oil at US$100.00
per barrel now seems a distinct possibility in
the not-too-distant future.
In market-oriented economies, i.e. where there
are no subsidies or price controls, one immediate
consequence has been a comparable spike in gasoline
prices. Last week, US gasoline prices climbed to
around US$2.90/gallon, 27 per cent higher than
one year ago. In Trinidad and Tobago, it seems
that the prospect of higher oil prices has served
only to heighten the election stakes. Aspirants
to political office are salivating at what may
be possible with an overflowing treasury oblivious
to the impact of rising subsidies on our long-term
viability. The petroleum fuels subsidy is now viewed
as a right in Trinidad and Tobago. It is, however
tantamount to shooting ourselves in the foot. This
column addressed the issue of the gasoline subsidy
in May. Given what has transpired over the last
few weeks it is useful to repeat some of the facts
from the earlier column for those who missed it.
Motorists in Trinidad and Tobago are among the
happiest in the world. The problem is we don't
know it. A recent study shows that Trinidad and
Tobago, at 35 US cents/litre, ranks 19th among
the countries with the cheapest transportation
fuels. In contrast, Norway, the world's seventh
largest oil producer and a country that policy
makers hold up as an example of good fiscal management
of its oil wealth, ranks third among the countries
with the most expensive fuel. (US$1.61/litre).
These are just two contrasting trends taken from
a recent study on International Transportation
fuel prices conducted by the German Technical Cooperation
Institute (GTZ). The study prompts the question
of whether the policy of subsidising transportation
fuel in Trinidad and Tobago and indeed across the
oil exporting developing countries, is not counter
productive.
In the last fiscal year 2006/7, the petroleum
fuels subsidy in Trinidad and Tobago is estimated
at over TT$1.5 billion, fully 3.5 per cent of the
national budget. To put this in perspective, consider
the budgetary allocation to agriculture. In the
2006/7 budget statement, the Finance Minister bragged
about a 25 per cent increase in the allocation
to agriculture to $750 million. In other words,
we are spending twice as much of our economic rents
on transportation in this small country than we
are spending on feeding ourselves.
The price of transportation fuels across the world
differs on a scale of 1 to 150, reflecting the
impact of subsidies on the lower end and taxes
on the upper end.
Trinidad and Tobago is of course not unique. Subsidised
transportation fuel is a phenomenon all across
the oil exporting developing countries. The top
20 among the cheapest countries in the world are
all oil exporters. Turkmenistan, Iraq, Venezuela,
Iran and Libya all sell gasoline below 10 US cents/litre.
Member states among the European community lie
at the other end of the spectrum. Transportation
fuels are heavily taxed with prices above US$1.50
/litre, for the top ten most expensive nations.
Barbados, Guyana and Jamaica all pay more than
twice as much for gasoline as does Trinidad and
Tobago. Those who boast about how cheap life is
in the USA should not. That fuel is about 50 per
cent more expensive in the Big Apple.
The argument for the transportation fuels subsidy
is a straight forward one. It is one of the mechanisms
used for sharing the hydrocarbon wealth with the
population. Citizens of these states now regard
this as a right. Any attempt to reduce or remove
the subsidy is tantamount to an act of political
suicide. A recent example is Yemen where Government's
attempt to increase gasoline prices evoked violent
protests that left 12 people dead. The Government
quickly relented, and reduced the size of the increase
by about 50 per cent.
The
second argument against removal of the subsidy
is that it would fuel inflation. While this is
a valid concern it is also part of the market mechanism
which would cause people to make adjustments in
their expenditure patterns. In fact, in the case
of T&T, it may well contribute to a reduction
in the rate of new car acquisitions. Subsided prices
are a distortion of market signals. For example,
if gasoline and diesel prices were allowed to reflect
world market conditions, there would be many more
CNG fuelled vehicles on the roads of Trinidad and
Tobago. CNG does not require a subsidy. The differential
between world market gasoline prices and a CNG
price is now so wide that the Dominican Republic
recently opened its first CNG station in a deliberate
strategy to replace gasoline with imported LNG.
The money saved from the subsidy reduction can
be used to fund the road development programme
including the long-standing problem of agricultural
access roads.
What the Government of Yemen recognised was that
the best time to wean the population off the subsidy
would be when the country is enjoying a period
of prosperity. It is a lesson that all oil exporting
developing states should learn, if only because
it will be very much more difficult to do so when
export earnings fall as a result of a drop in prices
or volumes. In this current silly season, however,
all the above is certain to fall on deaf ears.
Story
by Energy Correspondent from
Trinidad Express
- energyczartt@yahoo.com
Trinidad
Express
Wednesday, October 31st 2007
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