Now’s the time to end fuel subsidies, experts say
Economists: Falling oil prices will ease change
Top economists at the World Bank continued their push Wednesday to persuade developing nations to abandon policies that subsidize fuel prices, saying the recent plunge in oil prices makes such changes easier to implement.
“This is an opportunity for a regime switch in terms of how you do your oil pricing,” Kaushik Basu, the World Bank’s chief economist, said during a roundtable discussion of global oil markets at the spring meetings of the bank and the International Monetary Fund in Washington.
Overall, Basu said, the 50% decline in oil prices since June has been “a concern or hope” for major and developing nations, de- pending on whether they are largely exporters of oil or consumers.
“One of the things that we concluded from our studies is that, overall, the lower price regime that we seem to be going into is good for the world,” he said. “It’s going to mean a small but clear boost for global GDP.”
Perhaps most important for many nations is “a regime switch in terms of how you do oil pricing,” one that would cut or elimi- nate government subsidies for consumers and reflect the true cost of fuels and electricity, he said.
Shantayanan Devarajan, the bank’s chief economist for the Middle East and North Africa, said subsidy changes are particularly needed in those regions, which account for 3% of the world’s GDP but 50% of its energy subsidies.
“Some of these subsidies are on the order of 10% of GDP,” Dev- arajan said.
“This is an opportunity certainly for oil exporters,” whose revenues have fallen with the decline in oil prices, he said. “Their fiscal situation is so tight that they almost have to consider cutting subsidies.”
“For the oil importers,” he added, “this is an opportunity to tie domestic prices to world prices so that when oil prices go back up, we don’t see a ballooning of the subsidies.”
The potential for more oil production from the Middle East could put additional downward pressure on oil revenues for exporting nations, Devarajan said. Among the prospects for recovery are Libya, if warring factions reach some accommodation, and Iran, if Tehran signs a nuclear agreement with Western nations.
None of the economists offered a prediction of whether energy subsidies will become a bigger target for change.
“I’ve been a World Bank econo- mist for too long to say whether there will be (changes) or not,” said Sudhir Shetty, the bank’s chief economist for the Eastern Asia Pacific region.
But Shetty applauded nations where changes have taken place, such as Indonesia and Malaysia, and said they could serve as models for other nations.
The discussions came as the International Energy Agency released a report showing global oil supplies increasing to 95.2 million barrels a day in March, up 3.5 million barrels a day from one year ago.
But oil supply is still outpacing demand. IEA raised its forecast of 2015 oil demand by 90,000 barrels, to 93.6 million barrels a day.
The U.S. benchmark crude oil leaped $3.10 to settle at $56.39 a barrel, hitting its highest price this year.
Brent crude, an international oil benchmark, rose $1.89 to close at $60.32 in London, the Associated Press reported.