Oil Subsidies: Costly and Rising

• Author: Benedict Clements, David Coady, and John Piotrowski
• Position: Prepared by , , and . Text and charts based on Petroleum Product Subsidies: Costly, Inequitable, and Ring, published by the IMF in 2010. The report is available at www.imf.org/external/pubs/ft/spn/2010/spn1005.pdf

PETROLEUM product subsidies have increased in recent years. In 2003, global consumer subsidies for petroleum products totaled nearly $60 billion. By mid-2008, they had increased more than eightfold—to $520 billion. As international fuel prices surged during this period, many governments chose not to fully pass through these increases to domestic retail prices, resulting in rising subsidies. Although subsidies fell sharply in the second half of 2008 as oil prices dropped, they increased again throughout 2009 as oil prices rebounded, and are projected to reach almost $250 billion by the end of 2010.

But the true economic subsidy is even higher. In principle, petroleum product prices should include taxes both to contribute to government revenue requirements and to address domestic and global environmental damage. If taxes are too low, the result is a consumer “tax subsidy.” Based on a benchmark tax of $0.30 a liter that takes these considerations into account, the global “tax-inclusive” consumer subsidy is projected to reach $740 billion by the end of 2010, equivalent to 1 percent of global gross domestic product (GDP).

Who subsidizes?

Whereas all pretax subsidies are found in emerging and developing economies, advanced economies account for a sizable share of tax-inclusive subsidies. Of projected pretax subsidies totaling $250 billion in 2010, emerging economies account for 65 percent, developing economies for the remaining 35 percent. Of projected tax-inclusive subsidies of $740 billion in 2010, emerging economies account for 57 percent, developing economies 20 percent, and advanced economies the remaining 23 percent.

Who benefits?

Although subsidies are commonly believed to help the poorest, most of the benefit actually accrues to the highest-income households, which use more petroleum products. For example, in Africa, 65 percent of all fuel subsidies go to the richest 40 percent of households. But the distribution of subsidies also differs substantially across fuel products. The benefits of gasoline subsidies are the most regressive, with more than 80 percent of total benefits going to the richest 40 percent of households.

Promoting better options

Many...