WillPatching.com

Many US pundits believe developing nations are the culprits responsible for oil prices doubling from around $68 per barrel a year ago to their current dizzy heights.

Rising demand from China and India has undoubtedly had an effect although other offenders have been identified too: the greedy oil companies for profiteering, those nasty A-rabs running an ‘illegal’ cartel called OPEC, and mysterious evil speculators with their esoteric hedge funds that somehow create billionaires by manipulating gas prices in ways normal people cannot fathom…

Oil production will start to decline as demand continues to rise

Now the champions of free market forces have found a new scapegoat to attack: the emerging economies’ disgraceful habit of subsidizing fuel.

Subsidizing poor people distorts the market…

“We know demand is increasing because a lot of nations are still subsidizing oil, which ought to stop,” said US Energy Secretary Sam Bodman last month as he lectured developing countries for artificially stoking oil demand.

If only their governments would let the price of gasoline reflect its true cost at the pumps, so the theory goes, demand would reduce, thereby creating equilibrium in the market and a reduction in price back to ‘normal’ levels.

Bill Veno, an oil analyst with Cambridge Energy Research Associates sums up the problem: “These subsidies artificially protect consumers from the high price of oil.” Eliminating them “would have almost an immediate effect to curtail demand.”

Well, these experts, good old Sam and Bill, are pretty clear where the blame lies, eh? And they seem quite adamant that all such anti-market practices should end. Shouldn’t they?

So let’s start with the great capitalist exemplar: America.

But subsidizing US corporations is okay…

The US government has subsidized big oil for years, diverting billions from hard pressed taxpayers into the coffers of overpaid oil executives  and the bloated bank accounts of their shareholders – while artificially keeping gas prices at an acceptable level for voters.

There is no explicit per gallon subsidy at the point of sale like there is in, say, Indonesia, but there is plenty of money thrown at the US supply side. However, it is almost impossible to calculate the total of these direct subsidies, exploration incentives, royalty waivers and tax breaks bestowed on the great American oil industry, although estimates suggesting $20 billion a year are possibly conservative.

Hardly surprising then that this powerful lobby successfully stymied the Senate’s recent attempt to reduce taxpayers’ unwitting largesse, but regardless of spurious justifications for these oilcorp subsidies, the fact remains that the US is guilty of the charge it is now leveling at developing countries.

The Strategic Energy Security Premium

Dwarfing these overt payments is a much larger invisible subsidy: the price of gas in the States has consistently failed to reflect the energy security premium. What exactly is that? Quite simply it is the huge cost of maintaining an effective worldwide US military presence, largely deployed to protect the free flow of oil.

Regardless of whether you subscribe to Alan Greenspan’s view that the Iraq invasion was “largely about oil,” no one can deny the first Gulf conflict was about protecting oil supplies from Kuwait and Saudi Arabia. In truth, much of American foreign policy has been geared toward securing oil supplies since WWII, and some analysts suggest the bulk of America’s massive military expenditure is currently incurred protecting strategic oil supplies. If market forces were rigorously applied and these costs passed on to the US consumer at the pump rather than collected through a myriad of other taxes, the price of gas would double or even treble.

Such a hike would be impossible of course; no US government would dare levy an energy security premium since any additional tax on gas is always hugely unpopular – and would be seen as an attack on American citizens’ non-negotiable ‘way of life.’

Hence America’s failure to raise prices to a level comparable to its developed neighbors, thereby ensuring the population’s blasé approach to oil consumption continues unabated.

By contrast, much of the industrialized world has applied oil conservation measures triggered by the original energy crisis. Since the 1970’s the Europeans have imposed increasingly penal taxes on gasoline to reduce consumption, encourage fuel efficient vehicles and, more recently, lower carbon emissions. Meanwhile the American government has consistently pandered to the public’s gas guzzling habit with an attitude that apparently elevates cheap gas to the level of a constitutional right.

The resultant difference in cost at the pump is stark.

Gasoline taxes have inflated European prices to levels that would create riots in America: the average is double that of the US. Even the Brits’ stiff upper lips are twitching at having to pay around $9 per US gallon, while militant French haulers have gone on strike at having to fork out more than $10.

These figures make a suggested Energy Security Tax seem reasonable, even if it had the effect of doubling retail prices in the US.

Gas prices distorted by anti-subsidies

Meanwhile, no US economists are demanding these massive European taxes – anti-subsidies – should be dropped as they ‘distort’ the international market price of oil by artificially dampening demand. Instead they happily accept this advantageous disparity, marveling at the naivety of their conservation minded economic peers, whilst pointing their chubby fingers at poor countries like Indonesia, heaping shame on emerging nations for daring to help their citizens compete with the world’s richest economies for the lifeblood of their rural communities.

It is a sad fact that, in developing countries, food and energy costs make up the most significant proportion of household cost. John Kilduff, an energy analyst at MF Global in New York has a typical view regarding these poorer nations whose “customers just don’t have the durability U.S. customers do.” He acknowledges that oil price rises resulting from removing subsidies will have “a real impact on them.”

It may seem naive and old fashioned to us in the enlightened capitalist West, but these subsidies are the response of governments who are trying to help their people. Rather than their corporations…

Of course, some subsidized oil inevitably ends up in the petrol tanks of the rising ranks of the middle classes, but in this age of globalization, everyone wants to live like an American - and surely that’s laudable, isn’t it?

Development is A Good Thing…

But perhaps we should take a moment to reflect on how long current reserves of oil would last if everyone did live like a US citizen: just eight years. Really. (See link below.) 

That is a truly frightening statistic and one that suggests higher gas prices are inevitable. Rather than blaming the world’s poorest countries for their hardship perhaps this latest crisis will help Americans understand the impact of their gluttonous oil habit on the finite resources we have on our shared planet.

And maybe, just maybe, the most technologically advanced nation in the world will finally decide to inspire its brilliant scientists to innovate and create an economically viable alternative to the Bush/McCain solution of drilling for more oil.

 Let’s hope so.

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Links:
 Reuters quoting Bodman as he casts the blame elsewhere.

CNN quoting experts Veno and Kliduf on foreign gas subsidies.

The calculation showing how oil would last only 8 years if we were all following the American Way…

For more on the true cost of oil check out this link and also the excellent 2004 book by Michael Klare: Blood and Oil.