Why Global Fuel Prices Will Spark the Next Revolutions

Fiscal discipline and climate-change may demand an end to paying most of your country's gasoline bills, but trying selling that to hard-pressed citizens

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Mohammad Hannon / AP

Protesters at al Baqaa Palestinian Refugee Camp confront riot police and chant anti-king Abdullah slogans during a demonstration against the end of government fuel subsidies in Baqaa, Jordan, Nov. 15, 2012.

While the demonstrators that have mobbed the streets of Amman for two weeks now are demanding the overthrown of King Abdullah — a criminal offense in Jordan — it’s not the demand for democracy that sparked their protests. Instead, thousands of Jordanians have been spurred to act by a more basic issue: the rising price of gas after the government withdrew its subsidies.

Jordanians are hardly alone in their anger. Governments across the world are attempting to wean their citizens off subsidized fossil fuels —a critical issue which environmentalists say is a big contributor to the output of carbon gases that contribute to global warming, and which have even more immediately burdened public finances the world over by an estimated total of $523 billion last year — a 30% increase over the previous year. “In a lot of emerging and developing countries you see fuel subsidies, where the government is picking up the tab,” says Helen Mountford, deputy director of the environmental directorate for the Organization of Economic Cooperation and Development, or OECD, in Paris, which represents the world’s biggest economies. “In many cases it has been put in place to help support the poor.”

(MORE: Jordan’s Survival Strategy Hits a Wall — Tightening Funds Make It Hard to Buy Support)

For decades, the price paid at the gas pump for most of the world’s drivers has had little relationship to the true cost of fuel. Massive government subsidies have allowed millions of consumers to pay a token amount, in some places mere pennies per gallon. Jordanians, as it turns out, pay about $3.33 a gallon for gas, but in oil-rich Venezuela, the price for premium gas is just 9 cents a gallon, while in Saudi Arabia it is 61 cents, according to Bloomberg rankings. Such subsidies have long been a key prop in the political survival strategies of authoritarian governments, while even in more democratic countries fuel subsidies have become an untouchable entitlement.

But fuel subsidies are becoming increasingly untenable as governments face mounting budget deficits in a weakening global economy, amid oil prices that have remained above $100 a barrel since 2010. Jordan lifted subsidies in order to secure a $2 billion IMF loan in the face of a $3.2 billion shortfall in a budget that devotes $2.3 billion annually to subsidizing fuel and other basics.

Elsewhere, fuel subsidies are being challenged by government efforts to meet targeted cuts in their countries’ use of fossil fuels out of concern for global warming. Beginning back in 1992, when 192 countries signed the Kyoto Protocol on climate change, governments subsidizing fuel consumption have faced mounting criticism. The OECD estimates that if all such subsidies were ended, the result would be a 6% global drop in carbon gas emissions by 2050. Making fossil fuels affordable to most people, however, make it almost impossible to persuade them to voluntarily switch to renewable energy.  Nor would governments rush to invest billions in creating alternative energy, especially if they produce a huge surplus of oil themselves, and if they are devoting billions to subsidize fuel. The argument over subsidies will no doubt surface again during the U.N. conference on climate change, which opened on Monday in Doha, Qatar, and where governments will be called to account for what they are doing to lower their carbon gas emissions. Under the U.N. conventions, governments are committed not only to drastically lower those emissions, but also to make steep cuts in fuel subsidies. By 2035, Middle East governments are in theory aiming  to cap their subsidies at 20% — meaning, in most cases, that gas prices will multiply several times over.

(MORE: A Prime Minister Resigns in Jordan, and the Sun Rises in the East)

Cutting fuel subsidies, however, will be a massive political risk to many governments — as the recent events in Jordan demonstrate. Indonesia dropped plans last April to raise gas and diesel prices by 33%, after thousands of people protested the move. Iran, which spent a whopping $82 billion on fuel subsidies last year, quietly shelved a plan earlier this year to raise gas prices, fearing that inflation could spark protests.

Last January, thousands of people in Nigeria — Africa’s biggest oil producer — fought deadly street battles with police after the government cut its fuel subsidies resulting in a doubling of fuel prices.  After weeks of rioting, the government finally lowered the gas prices by one-third, leaving the cost about 50% higher than the previous subsidized price. And while the protests died down, the lessons learned were critical to planning how other countries ease in higher gas prices. Ideally, governments should have “public consultation prior to the price increases and measures to ease the burden on the poorest segments of the population,” said the International Energy Agency’s World Energy Outlook, a yearly report, published earlier this month.

Preparing consumers to pay higher prices will be extremely difficult in the absence of any tangible benefit, says Mountford. “Once you have subsidies in place it is very, very hard to remove them.”

After years of battling governments over this issue, economists have begun rethinking the strategy. Rather than impose blanket gas-price rises, they propose giving special benefits to poor families, perhaps with cash vouchers for gas, and explaining that rich people benefit most from cheap gas at the pump. “In Mexico, 20% of fuel subsidies go to the top 10% of households, whereas the lowest levels get very little,” Mountford says. “That is not surprising, since the richest people have the biggest cars. The really poor people don’t benefit.” That message has yet to filter through to people in Jordan, where the past two weeks’ protests have so far seen one person killed and 71 injured; on Friday protesters again mobbed the streets, shouting, “Those who want to raise prices want to see this country burn.” But the government is standing firm on its plan to raise the price of gas, 95% of which is imported — and bracing for another round of demonstrations expected on Friday.

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25 comments
hdc77494
hdc77494

This article is a good warning of the dangers of extending virtually any government entitlement. When the money runs out, which is a virtual certainty with politicians in charge of public money, the "victim" class will want your head.

megalon98133
megalon98133

>Jordanians, as it turns out, pay about $3.33 a gallon for gas, but in oil-rich Venezuela, the price for premium gas is just 9 cents a gallon, while in Saudi Arabia it is 61 cents

 Oh they should come to the US where we pay nearly $5 a gallon! Yet you don't see us rioting in the streets.. maybe we should..

alanferguson
alanferguson

The ultimate question is how much oil is in the earth to pump out.  Economists are not qualified to make authoritative statements on worldwide oil resources.  This is an area for geologists to be informing the rest of us.  The article, of course, does not address the question of oil resources; it looks at the environmental and economic results of continuing to use fossil fuels instead of replacing them with a more environmentally friendly alternative.  But the real interesting question resides underground. Geological research indicates that the environment will undergo a minimal period of severe damage because the planet is going to run out oil relatively quickly.  The long slope of oil usage for modern industrial and transportation purposes began in the early 19th century and it reached a peak of production and use during the mid-1990's.   Although the rate of consumption per capita has stayed about the same for the last fifty years,  the rate of population growth has  steadily increased at an alarming exponent,  and the downside of the slope, which we are clearly in now, will prove to be  much steeper, with the production rate at an increasing negative exponent. This means, whereas it took almost two centuries to reach maximum production, it may take as little as two or three decades to reach the bottom of the curve and zero production.  What will happen in the meantime before zero production occurs?  You can only guess what utter and complete economic devastation will come about worldwide, and no country will escape a depression that will be very difficult to climb out of because economies will not have the capital to begin production on what they should have done long ago, that is developing new sources of energy.  It is not just wise to make an all out commitment to developing new sources of energy now, it absolutely necessary if are in any way to avoid an economic descent that the world has never seen the likes of before.         

GinoSchafer
GinoSchafer

I love this article's laughable premise that man is causing global warming. First of all, for every "study" that shows the man causes global warming, I can show you one that doesn't. Second of all, the planet is not warming! Again, show me a study the says the planet has warmed up and I will show you one that says it has not. Third, what is the "optimal" planet temperature? Is it colder? Or warmer? The planet's climate has changed constantly for billions of  years. And it will continue to do so. And anyone who says that there is a consensus is not a scientist. Only politicians or people with an agenda use the term consensus when referring to a scientific theory. Real unbiased scientists do not use that term as they know it does not apply to scientific experiments.

jdyer2
jdyer2

Rising population and declining oil production is a dangerous combinations.  Add the fact that each calorie of food requires about 10 calories of fossil fuel to process and you see that food prices are proportional to energy prices.  Countries like Egypt and Jordan that are net food and oil importers, and have young growing populations are in serious danger of collapse.

DPR
DPR

From Broken indonesia: All support the golden West Papua Moluccas Sulawesi Borneo NusaBali Sumatra to be the new 7 countries Separated from java indonesia rather than the poor islamic palestinian.

akpat
akpat

Well its no wonder these people had problems with the fuel subsidies being removed. How many peopple here could afford to pay double for gas next week. It has to be withdraw slowly.

Not only that but a lot of the price rises come from speculation on the commodities market and its time to get speculators out of oil. At a time when the spot price for oil landed in NY was 145 the sold price at the shipping head in Saudi was less that $60/barrel, the expected reasonable price the saudis expected to land in NY.

That means to say on the way over the oil in that tanker more than doubled in price.

At the same time it cost only $23/barrel to extract in UT.   A small cartel of the oil companies, hedge funds and big banks are making a killing from it.

MadaKiki
MadaKiki

For less people, I think Taiwan has done well...XD

KahnKeller
KahnKeller

... the world needs less... people...

NorEastern
NorEastern

@GinoSchafer 

Well are you a real life scientist? Trust me, all of your points have beenconsidered by those of us in the scientific community. The carbon dioxide contribution to solar atmospheric heating is easily calculated using simple thermodynamics. Admittedly, global temperature is an incredibly complex system with many variables, but each individual chemical contribution is well understood.

To the best of my understanding there has has not been a single peer reviewed article in a major scientific journal in the last 20 years disputing the fact that the Earth is in fact warming. I am sure that the scientific community is united on on this front. 

moderateGuy
moderateGuy

@akpat For every dollar that this "small cartel of the oil companies, hedge funds and big banks" makes on fossil fuels, the governments of OECD make 7 dollars. Eliminate fuel taxes and no one will need subsidies.

GinoSchafer
GinoSchafer

@SwiftrightRight @GinoSchafer  

Ok smart guy, prove me wrong. I am a real scientist, not some fool sitting in his Mom's basement criticizing without backing it up. Let me guess, you voted for 0bama, right?

GinoSchafer
GinoSchafer

@NorEastern @GinoSchafer  

 Yes I am a scientist, I have been an analytical chemist working in industry for over 30 years. So let me exlpain something to you. When you read an artcile on global warming, you are reading the opinion of the person writing the article, who may or may not have read the actual study. On top of that, the study itself is the OPINION of a scientist (hopefully) who gathered data and formed his OPINION of that data. If you want the truth about a study you need to analyze the data in the study, not the opinoin of the scientist or a "journalist."

Start reviewing the data, if you can get it (Michael Mann is notorious for hiding his data and methods, thus has no credibility) and well talk about whether global warming is real or just a scam created by democrats and socialist/environmentalists to redistribute wealth.

And like I said, show me a study that proves man causes global warming and I'll show you one that says the exact opposite. But if you want to look at the data ..... we can come to our own conclusions.

JG
JG

@NorEastern @GinoSchafer  

The scientific community is not united on that front.

You could start with Climategate: A Veteran Meteorologist Exposes the Global Warming Scam by Brian Sussman.

akpat
akpat

@moderateGuy @akpat  The bulk of the cost of gasoline is caused by the cost of crude oil. The revenues to the government of this country are small and the revenues to the cartel big, that wehy oil companies are making a killing.

KahnKeller
KahnKeller

No...I am smart, weathly and ph.d. level educated... while you...a high school drop out....later ged...perhaps...would be the first to go...ta..ta... and bite me...

KahnKeller
KahnKeller

hey gino... you got it right... swiftright is a cross dresser with the i.q. of a card board box....no offense to card board boxes...and I would suspect he would not be allowed to vote...if writing was necessary...

NorEastern
NorEastern

@JG @NorEastern @GinoSchafer  

And what the heck would a meteorologist know about science. Brian Sussman Education - Undergrad: University Missouri. Meteorology - the program includes basic courses in physics, chemistry, biology, calculus, and computer science. He is NOT a scientist. He has the credentials of an accountant. Please find a reputable scientific resource.

KahnKeller
KahnKeller

..you know... you seem to have a "butt" fixation ...are you...well you know...a man who has sex with other men...and I would guess... a cross dresser and someone with no social skills...did you mommie mis treat you....oh well...this last thought....bite me...