Download Almost half of the world`s oil demand resides in non

Fuel Price Subsidization in Non-OECD Countries
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Almost half of the world’s oil demand resides in non-OECD countries in which much of
the demand for oil products is heavily subsidized. Annual demand growth in these
countries is expected to total 1.2 million bbl/d in 2008, accounting for virtually all of the
world’s demand growth. On average, non-OECD countries use oil for 65 percent of their
total energy consumption, in contrast to slightly more than 50% in OECD countries.
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Around 60 percent of demand in non-OECD countries, resides in countries where fuel
prices are either heavily subsidized or below international fuel price benchmarks.
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The IMF, in a study of 51 emerging and developing economies, found that only half of
their sample appears to have fully passed through the increase in international fuel prices
over the last four years.
o
Price adjustment mechanisms fall into three main categories: ad hoc, automatic
(based on a formula), and market based. Countries like Indonesia, China,
Malaysia, and Egypt are most prone to subsidization and are most affected by
increasing fuel prices. Automatic fuel price increases are used in South Africa,
Ghana, and Senegal. Most European countries, the US, Argentina, and the
Phillipines use liberalized or market-based fuel price adjustments. Even in
countries with fully liberalized fuel pricing, the pass-through from world
wholesale prices to retail product prices is sometimes lagged.
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There are significant costs to oil exporting countries that that do not adjust their domestic
prices to reflect higher world oil prices. A 2003 study found that the subsidy sometimes
totals as much as 3.5% of GDP. Other implications include:
o The subsidy is typically borne by national oil companies (NOCs) who are not
otherwise compensated through the country’s budget. Therefore, this can hinder
the NOC’s ability to allocate fiscal resources.
o Subsidies favor higher-income households since these households consume larger
quantities of petroleum products and thus benefit from subsidies. By distorting
the price signals, the subsidies can lead to wasteful consumption and investment
choices
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In China, fuel prices are about 40 percent lower than U.S. prices, but oil subsidies are
estimated to cost a manageable 1 percent of GDP. The cost is mostly borne by stateowned refiners who have reduced supply in an effort to cut their losses. PRC’s budget
surplus and small public debt means the government can delay cutting subsidies, and it
will most likely wait until food-price inflation has eased
o Subsidies cost the government over $2 billion in payments to Sinopec on 2005
and 2006.
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The attached documents show maps of the price subsidies in emerging markets. Red
indicates high fuel price subsidies and yellow indicates the presence of some fuel
subsidy.