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Fossil fuel subsidies or riots: you decide!

2012 January 10

The phasing out of fossil fuel subsidies has been a cause championed by the International Energy Agency for a number of years and by the G-20 in their July 2010 meeting. Typically seen in countries that are large oil and gas exporters, fossil fuel subsidies amounted to about $400bn worldwide in 2010. For many of the governments of these exporting countries (especially developing countries), they are seen as a way to encourage economic activity and alleviate poverty. There is some rationale here, but the negative impacts are numerous and have been well documented: drain on state budgets, create barriers for clean energy investment, encourage wasteful consumption, etc. Well, in the past few days, Nigeria decided to remove their subsidies for oil overnight, causing the price of gas to spike from 65 naira (40 cents) to at least 141 naira (86 cents). The result: riots in the streets! It was covered well in a CNN article and by Al Jazeera, seen here:

Some thoughts:

1) What was the Nigerian government thinking in “ripping off the band aid” and implementing this change overnight? Obviously, many Nigerians were very reliant on cheap oil for their day to day life and economic activity, and are enraged by this change (although there are other important overtones of just general disapproval of lack of government’s transparency). The government must have recognized this so why just flip the switch overnight? Couldn’t they have phased in the subsidy removal gradually over time?

2) The government’s intention on paper is noble: to use the $8 billion/yr in funds instead on improving infrastructure, like for instance increased electricity supply. I imagine many of the lower class Nigerians purchase oil to run diesel electric generators for their local shops and businesses. So if higher oil prices cause running diesel generators to make little economic sense, but Nigerians get electricity in return down the line, this would be a win. Of course, it may not be so simple, and Nigeria’s government is very corrupt.

3) Fossil fuel subsidies are hard to remove once in place, either because of immediate economic impacts or entrenched business interests. Obama (as well as the Supercommittee) has proposed a number of times now to remove the $4 billion/yr in subsidies our oil, gas, and coal producing industries get in the U.S., but so far with zero success.

4) On other end of spectrum of Nigeria’s dirt cheap oil (about $1.50/gallon), you have incredibly pricey oil because of taxes instead of subsidies (that’s right, government revenue instead of government expenditure). GOOD Magazine had an awesome article on this about a year ago, with the following table:

And even with our relatively low prices compared to all of EU (and even Canada!), politicians are always trying to promise voters some bunk idea for making gas prices cheaper.

5) Say 30 years in the future, will people riot in the streets of California when clean energy subsidies are removed and we can’t charge our electric vehicles for $1 a tank (of electrons)? When people get used to cheap energy, they want to keep it that way. Sticker shock…we’re all guilty.

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