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One upside of cheap oil — countries are ditching their fossil-fuel subsidies

This picture taken on August 29, 2014 shows motorists queuing to fill their motorcycles with non-subsidized gasoline at a fuel station in Jakarta.
This picture taken on August 29, 2014 shows motorists queuing to fill their motorcycles with non-subsidized gasoline at a fuel station in Jakarta.
(Bay Ismoyo/AFP/Getty Images)

In 2013, governments around the world spent $548 billion to subsidize the use of oil, gas, and coal. This practice drives economists absolutely nuts: they say it's wasteful, eats up budgets, and leads to more pollution and global warming than would otherwise be the case.

Yet countries have long been reluctant to scrap these fossil-fuel subsidies. After all, if the government stops underwriting the cost of gasoline, prices will rise at the pump. That makes people upset — and can lead to protests or riots, as happened in Nigeria in 2012.

Lately, however, that's started to change. The price of oil has been plunging, and gasoline is getting cheaper. And that's made it less painful for nations that are trying to rein in bloated fossil-fuel subsidies. Back in July, Egypt began slashing billions in government energy subsidies. Indonesia has been doing the same. So has Ghana. India is now deregulating its diesel prices. Iran has been slowly hiking its artificially low gasoline prices.

It's all starting to add up. In November 2014, the International Energy Agency (IEA) reported that 27 countries have been cutting back on fossil-fuel subsidies in some form or other. The agency no longer expects total subsidies to soar to $660 billion by 2020, as it once projected.

If these cuts continue, this could end up being a big deal: scaling back these subsidies is seen as one of the most straightforward ways to bolster the global economy and help address climate change.

The case against fossil-fuel subsidies

In 2013, countries like Iran, Saudi Arabia, Russia, India, Venezuela, and China spent $548 billion subsidizing fossil-fuel consumption, according to the IEA:

(International Energy Agency)

The IEA only counts subsidies for fossil-fuel consumption, not production.* These subsidies can take all sorts of forms — direct payments, price controls, tax rebates. But generally, when consumers are paying less than the market price for oil, gas, or coal, it's considered a subsidy. In Venezuela, for instance, subsidized gasoline only costs about 5 cents per gallon.

Economists at the International Monetary Fund and elsewhere have long argued that these subsidies are terrible: They distort the economy, crowd out other useful public spending, and depress private investment in the energy sector. They also gobble up budgets: For years, Egypt regularly spent 8 percent of its GDP underwriting fossil fuels — more than it spends on education and public health combined. And, while they do ease fuel costs for poorer families, they tend to so far more inefficiently than other safety-net measures.

On top of that, these subsidies lead to more pollution and more greenhouse gases that cause global warming. If you make oil and coal artificially cheap, people use more of it. Back in 2013, the IMF estimated that if governments repealed all these subsidies, global greenhouse-gas emissions would fall by 2 percent. It's a pretty straightforward way to help address climate change.

The problem, of course, is that repealing subsidies is much easier said than done. In the long term, sure, economies benefit. But in the short term, people see prices go up and get angry. Nigeria saw strikes and protests in 2012 after government proposals to scrap a fuel-import subsidy. So there's long been an impasse.

Cheap oil makes it easier to cut fossil-fuel subsidies

Spot price of Brent Crude, updated on January 23, 2015 (Joss Fong/Vox)

Lately, however, the price of oil has been plummeting, which means gasoline is getting cheaper for everyone around the world. That blunts some of the pain for any country that wants to pare back its subsidies and allow prices to rise.

Back in July — before prices started to fall — Egypt announced plans to start phasing out its massive energy subsidy program. Since July, the government has saved roughly $7 billion, or about 2 percent of GDP. The country now plans to eliminate all subsidies within five years and devote the savings toward health and education.

Indonesia has been something similar, altering rules on gasoline and diesel and letting the price rise more than 30 percent. The government is hoping that the plan will ease pressure on the budget and tamp down on oil use, which will cut imports and ease the country's trade imbalance. The move is unpopular with middle-class voters, but low oil prices have partly blunted the impact.

Dozens of other countries are starting to carry out similar reforms: Ghana abolished its fossil-fuel subsidies entirely last year, and Morocco and Jordan are now carrying out similar reforms. Iran has been slowly allowing government-controlled fuel prices to rise. These countries aren't necessarily cutting subsidies because oil prices are falling (often they're doing it to alleviate budget pressures). But falling oil prices do smooth the transition.

Egyptians wait in long lines of car queues at petrol stations after Egyptian Government stated the indispensability of petrol price hike in Mansoura, Egypt on July 2, 2014. (Sayed Albaz/Anadolu Agency/Getty Images)

In November, the International Energy Agency noted that some 27 countries were now making reforms. As a result, global fossil-fuel subsidies are no longer on pace to rise dramatically to $660 billion by 2020.

It remains to be seen how many other countries follow suit. Venezuela's president, Nicolas Marduro, is reportedly considering scaling back gasoline subsidies as his country faces an economic crisis. But major fossil-fuel subsidizers like Saudi Arabia and Russia have yet to announce any major reforms.

In a January speech, Maria van der Hoeven, executive director of the International Energy Agency, urged other countries to seize the moment. "Low oil prices present an opportunity for policymakers," she said, "to accomplish goals that would otherwise be more politically or economically difficult." She also mentioned that now — while oil prices are low — might be a good time to think about carbon taxes to tackle global warming.

Back in 2013, the IMF offered some tips for poorer countries trying to navigate this minefield. Ideally, subsidies would be phased out slowly and paired with measures to mitigate the impact on the poor. In her speech, van der Hoeven noted this should be doable, since energy subsidies tend to be an inefficient way to help the poor anyway — only about 8 percent of the benefit of fossil-fuel subsidies goes to the poorest 20 percent.

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* Note: The IEA chart above only shows subsidies for fossil-fuel consumption. It doesn't give estimates of government support for fossil-fuel production — tax credits for drilling, say, or R&D.

One issue here is that production subsidies are much, much harder to calculate, though some groups have estimated they're worth about $100 billion per year globally. Oil Change International estimates that US fossil-fuel production subsidies amounted to $21 billion in 2013, though this includes things like tax deductions that all US manufacturers get. So a lot depends on how and what you count.