Oil subsidy is bad economics

Last Monday, Asian trading sent crude prices to levels perilously close to breaching the $60 per barrel mark. The only time that international crude went beyond this level was in 1980 when Iran and Iraq went to war against each other.

With crude at more than double its cost from five years ago, countries are experiencing various discomfitures – from transportation rate increases to a general slowing down of consumer demand. As governments look for options to appease consumers, the pressure to use subsidy mechanisms to cushion the impact on many local economies is also back.

Subsidies Cripple Economy

An assessment made by the Asian Development Bank (ADB) showed some Asian countries that have embraced oil subsidies to pacify their people’s outrage are facing rising fiscal liabilities and opportunity losses, and are leaving their economies more at a disadvantage.

What makes it even worse, the ADB said, is the fact that oil price subsidies in countries such as Indonesia, Malaysia and Thailand have even led to an abuse or excessive and inefficient use of oil products.

There is also the issue of inequity. Since taxpayers’ money is being used to subsidize oil prices, even those who are not using that much oil are being burdened by its high cost and are deprived of the basic services where the tax money should really be spent.

As the ADB would have it: "The message that emerges is that continued oil subsidies can be justified neither on equity nor efficiency grounds."

Thus, the international bank strongly recommended "Aligning the underpriced markets with international prices would lead to more efficient use of oil, force productivity improvements, and increase competitiveness over time," it said.

Increasing Pressure On Budget Deficits

The ADB cited Indonesia as an example, with its oil subsidy budget rising four times to about $6.8 billion in 2004, already representing three percent of its domestic economy. This year, with oil prices rising by more than 35 percent, the impact on Indonesia’s national budget would be short of catastrophic.

Malaysia spent roughly $1.3 billion or four percent of its budget last year to keep prices low. Meanwhile, Thailand’s Oil Price Stabilization Fund which is funded by taxpayers‚ money has registered a deficit of $1 billion and is now a growing fiscal concern.

In a related development, Sri Lanka’s central bank recently asked its government to remove fuel subsidies. Sri Lanka’s monetary regulator was complaining of increased subsidy payments that was exerting pressure on the fiscal budget, domestic borrowings and the rising external trade deficit.

Local subsidies on gasoline is already 12.8 percent of pump prices, while that of diesel, which is used by the public transport, is at 21.2 percent.

The above-mentioned countries are starting to learn their lesson. Having taken a populist stance of keeping oil prices artificially down, their actions are taking a huge drag on their coffers, not to mention encouraging a more wasteful consumption of oil and oil products.

Expensive Lessons

The Philippines should well and truly steer away from any temptation to bring back the OPSF just so that people will stop grumbling about high prices of gasoline, diesel, and LPG – especially now that there is marked political uncertainty from the so-dubbed Gloria-gate tapes.

In the early 90s, before the local oil industry was deregulated, domestic petroleum product prices were heavily subsidized. Fearing public uprising if fare rates would be hiked, the government continued to absorb the cost of higher gasoline and diesel with subsidies reaching to as high as P30 billion.

We do not need to revisit our history to remind us of that expensive lesson of subjecting oil prices to populist politics. We just need to look at the painful process that our neighboring countries today are going through to be convinced that subsidies will never be the right path, especially when oil products is concerned.

Imagine spending four percent of our GDP to subsidize oil prices! This amount will even be larger than this year’s projected budget deficit of P180 billion.

Enercon Still Makes Sense

As crude oil prices continue to be volatile, the best way to cushion our economy from its ill effects is to seek ways and means of conserving on the use of fuel products and electricity.

The ADB also advises governments to support new renewable and energy-efficient technologies. For the Philippines, there is huge potential from the more mature alternative energy systems that use solar and wind power, not to mention water.

Record-high oil prices should be seen as an excellent reason to push through with lifestyles that consider the fact that fossil-based fuels are non-renewable, and that its future cost will be vulnerable to decreasing supply and rising demand scenarios.

New Legislation Or Better Implementation?

The pre-need fiasco has shattered the dreams of thousands who were made to believe that the education assistance benefits that they paid for would be readily available when their sons and daughters start the expensive journey towards completing their education.

Both the Senate and the House of Representatives were pressured to come up with legislative solutions. But if you ask the hapless planholders, a pre-need code now is not that important. Their main concern is to avail of the benefits or at least get back their hard-earned money.

What are the findings so far of the House Committee on Oversight regarding the failures of pre-need companies? To what extent is mismanagement and inappropriate diversion of funds the cause of these failures? What lapses in the regulation and supervision of the industry have been identified?

Join us in "BREAKING BARRIERS" on Wednesday, 29th June 2005, IBC-TV13 (11 p.m.) and gain insights into the views of Rep. Danilo E. Suarez of the 3rd district of Quezon province and chairman of the committee on oversight on various issues related to the pre-need industry and the role of the committee on oversight in the legislative machinery.

Watch it.

Should you wish to share any insights, write me at Link Edge, 4th Floor, 156 Valero Street, Salcedo Village, 1227 Makati City. Or e-mail me at [email protected] or [email protected]. If you wish to view the previous columns, you may visit my website at http://bizlinks.linkedge.biz.