Advancing a Free Society

Subsidies to Oil and Other Energy Sources

Monday, May 16, 2011

President Obama and members of Congress are calling for a sharp reduction in the substantial direct subsidies to American oil companies. Many countries also give an indirect subsidy to oil producers and refiners by subsidizing the purchase of gasoline. In Saudi Arabia, for example, subsidies have reduced the price of a liter of gasoline (1 gallon equals about 3 ¾ liters) to 12 cents, which had made gasoline there cheaper than bottled water. The largest subsidies to gasoline are usually found in oil producing countries: Saudi Arabia, Iran (although the Iranian government greatly reduced gasoline subsidies in 2010), Russia, Venezuela, Indonesia, and the UAE. Yet, the economic case for either direct or indirect subsidies to the production and refining of oil is quite weak.

One argument commonly made for subsidizing gasoline prices, especially when, as at present, oil prices are rising rapidly, is that this helps the poor. Yet these subsidies disproportionately favor the middle classes and the rich since poor families in general, and especially those in developing countries like Indonesia, Egypt, and Iran, are much less likely to own cars, and the poor drive fewer miles with the cars they do own.

Continue reading Gary Becker at The Becker-Posner Blog