On those subsidies for fossil fuels

Yes, they really do exist. Subsidies for the use of fossil fuels. Obviously this is insane when we\’ve also got huge subsidies for the use of non-fossil fuels.

The thing is though, it\’s different countries offering the different subsidies. It\’s the rich western countries subsidising non-fossil while the fossil fuel subsidies are all in poor and developing nations.

Like Iran for example:

However, one area that could lead to serious damage to the economy is the price of diesel. As of Sunday, the Iranian government increased its price from 1.6c to 15c a litre – a 900% increase. It is envisaged that soon this will increase to 35c.

It\’s said (by a real international agency, not mere scuttlebutt) that Iran actually coughs up $100 billion a year in such subsidies to gas and oil use. It\’s an entirely insane level of subsidy in an economy of that size: some 25% of the economy at market exchange rates, perhaps 10% at PPP.

Removing such a distortion is obviously good economics. But as so often is true, it could well be what turns the masses against the Islamic government and is therefore bad politics.

Update for Matthew.

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That\’s the Tehran skyline. I\’d take it as a resonable argument against the Iranian Govt subsidising the use of fossil fuels.

19 thoughts on “On those subsidies for fossil fuels”

  1. A minor point, but what is Iran’s cost of producing a litre of diesel? I mean the subsidy isn’t probably as damaging as it seems if it simply transferring money around the economy .

    Tim adds: Quite high. For they’ve not enough refining capacity and thus end up buying a lot of their petrol and diesel on the world markets and importing it. There is a real and high cash cost to their subsidies. And of course, even if they were refining their own crude and valuing said crude at production cost ($8-$10 a barrel I believe) then there’s still the opportunity cost of not selling at the market price.

  2. “there’s still the opportunity cost of not selling at the market price”.

    but surely an opportunity cost to the Govt (assuming industry nationalised) matched by gain to citizens. Which given I trust citizens spending more than governments might be a good thing, no?

  3. Matthew, the problem is that government don’t exist, not any more than corporations do. A cost on governments is really a cost to citizens and taxpayers. If a government wastes money, its citizens and taxpayers either pay more tax or get less other government services than they would otherwise do.
    And what typically happens is that as well as the direct costs, there’s some indirect losses, from the admin costs of collecting the extra tax money, and deadweight losses from higher taxes, so citizens and taxpayers lose even more overall than the headline numbers.

  4. Tracy – I’m aware of such arguments about corporations/governments (apply more to the former than the latter in my opinion) but isn’t that what I am saying?

    The Iranian government could charge market price for oil (or proper price, which is probably higher), and then redistribute the money as a dividend to each citizen. Or buy hospitals.

    But it could also buy nuclear weapons, or fund wads, or give it to a small elite.

    So isn’t the issue whether the distribution through cheaper oil is any less corrupt and inequal than any other method that is likely?

    This is a separate argument from the distortionary effects, although of course there would be distortionary effects from most other policies.

  5. Subsidising waste to the degree that Iran does is even more inefficient than normal government incompetence. It is hard to think of another policy that reduces the wealth of the country quite so efficiently.

    Never mind they have at least been forced to make a start thanks to the embargo of the great satan

  6. they’ve not enough refining capacity and thus end up buying a lot of their petrol and diesel on the world markets and importing it.

    This I knew not, and does change the emphasis. If they were selling domestically produced products at domestic market rates, then selling the excess on the international markets at international rates, that would be something I’d broadly support, they’re an exporting nation.

    But if they’re actually importing lots of refined goods, they’re being daft, they should be able, at the very least, to provide their own domestic market with products they’ve refined themselves. If the can’t that’s a massive failure.

    Oh, wait, subsidies of that level prevent the investment returns needed to build the capacity in the first place. D’oh!

    IIRC, the UK is very insistent on breaking up extraction companies and importing companies, they may be divisions of the same corp, but the importers have to buy at market rates ensuring decent price competition at the pump and therefore little to no profit being made on the domestic fuel costs, right?

  7. Matthew – out of curiousity, how do you think that that the fact that the organisations don’t really exist, so they can’t really bear costs, apply more to corporations than to governments?

    The advantage of the Iranian government charging the market price for oil, and then redistributing the money as a dividend to each citizen, rather than providing oil subsidies, is that a straight dividend would go equally to people who don’t use oil as to those who do. That’s the bit that is inequal, and I can’t think of a good reason why it should be unequal. I’ve come across plenty of moral arguments that we should, say, provide healthcare for the poor, or subsidise winter heating for the poor, or education for everyone. I haven’t come across any moral arguments as to why we should subsidise people who like to drive a lot.

    I agree that the Iranian government is entirely capable of wasting oil money in other ways, such as funding wars, or giving money to elites. Judging by the history of the world, governments are entirely capable of wasting money raised from taxes in other ways. Japan, for example, wasted its taxpayers money on WWII to pursue a plan to *get* access to oil, and other natural resources. Wasting government money is bad regardless of how it was raised.

  8. it could well be what turns the masses against the Islamic government and is therefore bad politics

    Only from the narrow pov of the Islamists in power – this may be aided by reformers in the Finance and Oil Ministries going for the (hopefully not literally) nuclear option and expecting to pick up the pieces once the riots are over. Just constructing a pleasant conspiracy …

  9. Tracey – so I think we’re near agreeing. Basically the debate is this, as far as I understand it. If the Iranian govt sends $200bn on subsiding oil sales to it citizens, I’m saying that obviously this is wasting money, but it’s not wasting $200bn of money, as that money is going back to Iranian citizens.
    ————
    I had to think exactly why I think it applies more to corporates than govts , but I think it’s to do with taxation being compulsory, and equity ownership not. In a very real sense the Iranian govt is a separate body to its citizens and I think it makes more sense to view it a such.

  10. In a very real sense the Iranian govt is a separate body to its citizens and I think it makes more sense to view it a such.

    Again, I’m curious. What is this very real sense?

  11. Tim – I don’t really understand the update. I’m very against the subsidy, my only argument is a) it doesn’t cost as much as it seems to cost on a narrow financial focus, and b) we have to wonder to what purpose the Iranian government would put the additional funds.

    Tim adds: The photo is showing that it costs more than it appears just from the narrow financial focus….

  12. Are we rediscovering economics 101 here in the comments?

    The real cost of the fuel to Iran is the world market price – say 35c – because this is what it could be sold for. The subsidy which makes the price in Iran differ from this is a transfer from taxpayers to consumers, who are broadly the same people, so it is true that roughly speaking that is not a net loss to Iran.

    The net loss arises from the marginal effects – all those little triangles, which for a distortion on this scale aren’t that little. The Iranian economy pretends that an input that really costs 35c costs 1.5c. Consequently, factories and other places burn vast amounts of the stuff, rather than alternatives that are actually cheaper (cost 1.5c).

    These alternatives probably include investing in energy-efficient techniques and so on, I’m not talking so much about other fuels.

  13. Hmm. My second-last paragraph got a bit garbled, as I think I cut the sentence containing the key point while rearranging things. It’s a natural form of hubris, when writing a comment loftily corecting people like this. Let me try again:

    There will be alternatives to diesel, that cost between 1.5c and 35c. The Iranian economy would be better off using these than diesel, because the cost of the diesel is really 35c. However, because to ordinary Iranians, the cost of diesel looks like it is 1.5c, these alternatives will not be chosen. That’s the real loss to Iran: inefficient use of resources.

  14. Flat Eric – Yes, that’s exactly my point – pleased to see someone gets it.

    Tim: The photo is showing that it costs more than it appears just from the narrow financial focus….” Yes, that’s what ‘doesn’t cost as much as it seems on a narrow financial focus’

    Tracy – I don’t think Iranian citizesns have much way of affecting decisionsn of Iranian govt or indeed emigrating. I know its fashionable to say Iran’s ‘actually a democracy’ but you shouldn’t believe it.

  15. Matthew – I agree that the Iranian government is not representative of the bulk of its citizens. But yet, even though it’s not a democracy, its citizens are going to have to pay the price for its spending and taxing decisions anyway.

    In other words, “No taxation without representation!” was a normative statement about how the world should be, not a scientific law about how it is.

  16. Matt and FlatEric are right. The only thing to add is that if the Iranian government instead sold the oil for cash, I’m sceptical they’d use the cash for things that were of equal or greater benefit to the public (rather than, say, more nuclear development or more religious policemen’s wages).

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