My colleague Roy Cordato has written and spoken in recent weeks about the fall in gas prices and why it’s good news. His basic argument is that petroleum is an input into virtually everything we buy, so not only do lower gas prices make it less costly to fill up our cars (leaving more money in our pockets for everything else), they also make the production of everything else less expensive.
But there’s even more reason to be excited about low gas prices. As Vox.com wrote this week, One upside of cheap oil: countries are ditching their fossil-fuel subsidies.
Each year, governments around the world spend some $550 billion to subsidize the use of oil, gas, and coal. This practice drives economists absolutely nuts…
But countries have long been reluctant to scrap their fossil-fuel subsidies. After all, if the government stops underwriting the cost of gasoline, prices will go up at the pump. And that can make people upset…
Recently, however, that’s started to change. The price of oil is plummeting, and gasoline is getting cheaper. That’s made it far less painful to pare back these fossil-fuel subsidies.
OK, but is that a good thing? Does it matter? YES!
The IMF has long argued that these subsidies are terrible: They distort the economy, crowd out other useful public spending, and depress private investment in the energy sector. They also gobble up budgets. For years, Egypt regularly spent 8 percent of its GDP underwriting fossil fuels — more than it spends on education and public health combined. And this was all while running deficits of around 8 percent of GDP.
Did you catch that? And 8% deficit while spending 8% on fossil fuel subsidies. That seems like an obvious fix.
Last year, Egypt announced plans to start phasing out its massive energy subsidies. Since July, the government has saved roughly $7 billion — or about 2 percent of GDP. And low oil prices are helping: The country now plans to eliminate all subsidies entirely within five years and plow the savings into for health and education.
All of this just makes sense, which is why even Venezuela may be cutting subsidies for oil. In the US, we don’t subsidize gas the way governments in many developing nations do, but readers of this blog will be aware that we do subsidize lots of other sectors. In North Carolina, we give all sorts of economic incentives, film incentives, historic preservation tax credits, etc. Won’t the impact be exactly the same as it is in Egypt? Won’t all these incentives eat up tax dollars that could better be used in other ways – public schools, roads, or lowering taxes across the board. And don’t they distort the economy, taking money that would be invested elsewhere and directing it to favored industries?
Maybe we should take a lesson from Egypt on this one.
