As I said in my previous post, a gasoline tax holiday wouldn't make much, if any, difference in the price of gas at the pump. But if it did lower prices, the U.S. would be joining much of the rest of the world in helping keep demand artificially high. That's a recipe for fiscal disaster, and it distorts the market in disturbing ways.
Many countries - especially in the developing world -- are actually directly subsidizing fuel prices. In the name of helping their citizens cope, they are subsidizing energy waste, subsidizing an addiction to imports, and subsidizing the growth of greenhouse gas emissions.
Of course, as oil prices rise, so do the costs of these fuel subsidies. Many of these countries are also trying to hold food prices steady as the prices of global food commodities soar.
This came up in a conversation I had this week with Rob J. Routs, executive director for oil products and chemicals at Royal Dutch Shell Group. "Half of the world is not seeing the real oil price," he said. He cited India, Indonesia and China, among others, who are subsidizing oil prices so that consumers don't pay the full amount. The subsidies, he said, create false economic signals. "In some countries," he said, "people have gone 12 months and they haven't seen an increase at the pump. That keeps demand up."
For more information I turned to the International Monetary Fund Web site where Amine Mati of the fiscal affairs department wrote a paper earlier this spring tactfully titled "Managing Surging Oil Prices in the Developing World." Actually, they're not being managed very well. "Less than half of a sample of 42 developing and emerging market countries fully passed through sharply higher world oil prices to retail customers in 2007," Mati writes.
The biggest culprits: Oil exporting countries. They can afford it, given high oil prices. But it's still bad energy and climate policy. Not surprisingly, the Middle East is the one area of the world whose increase in oil consumption rivals China's.
Some countries do tax fuel, but over the past couple of years they have used the McCain-Clinton approach to limiting the big increases in domestic prices. Lebanon, Mexico, and Peru have cut excise taxes and the Philippines and Ukraine have lowered import duties. In India, subsidies for widely-used kerosene are also important and the government floats special bonds to cover the losses oil companies have because of price controls. The Economist reported late last year that India's fuel subsidies might cost as much as $17.5 billion in 2007, according to Lombard Street Research, a British firm of economists. "That amounts to as much as 2% of the country's GDP," the magazine said. If that's right, then higher than expected oil prices this year will probably punch a $3 billion or $4 billion hole in the government's budget.
In all these cases, the dilemma for the governments is the same: Pain now or pain later. With rising oil prices, the pain deferred gets bigger all the time.