Why Global Fuel Prices Will Spark the Next Revolutions

Once you have subsidies in place it is very, very hard to remove them

By Vivienne Walt

Protesters at al Baqaa Palestinian Refugee Camp confront riot police and chant anti-king Abdullah slogans during a demonstration against the end of government fuel subsidies in Baqaa, Jordan, Nov. 15, 2012.

While the demonstrators that have mobbed the streets of Amman for two weeks now are demanding the overthrown of King Abdullah — a criminal offense in Jordan — it’s not the demand for democracy that sparked their protests. Instead, thousands of Jordanians have been spurred to act by a more basic issue: the rising price of gas after the government withdrew its subsidies.

Jordanians are hardly alone in their anger. Governments across the world are attempting to wean their citizens off subsidized fossil fuels —a critical issue which environmentalists say is a big contributor to the output of carbon gases that contribute to global warming, and which have even more immediately burdened public finances the world over by an estimated total of $523 billion last year — a 30% increase over the previous year. “In a lot of emerging and developing countries you see fuel subsidies, where the government is picking up the tab,” says Helen Mountford, deputy director of the environmental directorate for the Organization of Economic Cooperation and Development, or OECD, in Paris, which represents the world’s biggest economies. “In many cases it has been put in place to help support the poor.”

For decades, the price paid at the gas pump for most of the world’s drivers has had little relationship to the true cost of fuel. Massive government subsidies have allowed millions of consumers to pay a token amount, in some places mere pennies per gallon. Jordanians, as it turns out, pay about $3.33 a gallon for gas, but in oil-rich Venezuela, the price for premium gas is just 9 cents a gallon, while in Saudi Arabia it is 61 cents, according to Bloomberg rankings. Such subsidies have long been a key prop in the political survival strategies of authoritarian governments, while even in more democratic countries fuel subsidies have become an untouchable entitlement.

But fuel subsidies are becoming increasingly untenable as governments face mounting budget deficits in a weakening global economy, amid oil prices that have remained above $100 a barrel since 2010. Jordan lifted subsidies in order to secure a $2 billion IMF loan in the face of a $3.2 billion shortfall in a budget that devotes $2.3 billion annually to subsidizing fuel and other basics.

Elsewhere, fuel subsidies are being challenged by government efforts to meet targeted cuts in their countries’ use of fossil fuels out of concern for global warming. Beginning back in 1992, when 192 countries signed the Kyoto Protocol on climate change, governments subsidizing fuel consumption have faced mounting criticism. The OECD estimates that if all such subsidies were ended, the result would be a 6% global drop in carbon gas emissions by 2050. Making fossil fuels affordable to most people, however, make it almost impossible to persuade them to voluntarily switch to renewable energy.  Nor would governments rush to invest billions in creating alternative energy, especially if they produce a huge surplus of oil themselves, and if they are devoting billions to subsidize fuel. The argument over subsidies will no doubt surface again during the U.N. conference on climate change, which opened on Monday in Doha, Qatar, and where governments will be called to account for what they are doing to lower their carbon gas emissions. Under the U.N. conventions, governments are committed not only to drastically lower those emissions, but also to make steep cuts in fuel subsidies. By 2035, Middle East governments are in theory aiming  to cap their subsidies at 20% — meaning, in most cases, that gas prices will multiply several times over.

Cutting fuel subsidies, however, will be a massive political risk to many governments — as the recent events in Jordan demonstrate. Indonesia dropped plans last April to raise gas and diesel prices by 33%, after thousands of people protested the move. Iran, which spent a whopping $82 billion on fuel subsidies last year, quietly shelved a plan earlier this year to raise gas prices, fearing that inflation could spark protests.

Last January, thousands of people in Nigeria — Africa’s biggest oil producer — fought deadly street battles with police after the government cut its fuel subsidies resulting in a doubling of fuel prices.  After weeks of rioting, the government finally lowered the gas prices by one-third, leaving the cost about 50% higher than the previous subsidized price. And while the protests died down, the lessons learned were critical to planning how other countries ease in higher gas prices. Ideally, governments should have “public consultation prior to the price increases and measures to ease the burden on the poorest segments of the population,” said the International Energy Agency’s World Energy Outlook, a yearly report, published earlier this month.

Preparing consumers to pay higher prices will be extremely difficult in the absence of any tangible benefit, says Mountford. “Once you have subsidies in place it is very, very hard to remove them.”

After years of battling governments over this issue, economists have begun rethinking the strategy. Rather than impose blanket gas-price rises, they propose giving special benefits to poor families, perhaps with cash vouchers for gas, and explaining that rich people benefit most from cheap gas at the pump. “In Mexico, 20% of fuel subsidies go to the top 10% of households, whereas the lowest levels get very little,” Mountford says. “That is not surprising, since the richest people have the biggest cars. The really poor people don’t benefit.” That message has yet to filter through to people in Jordan, where the past two weeks’ protests have so far seen one person killed and 71 injured; on Friday protesters again mobbed the streets, shouting, “Those who want to raise prices want to see this country burn.” But the government is standing firm on its plan to raise the price of gas, 95% of which is imported — and bracing for another round of demonstrations expected on Friday.