China Ends Fuel Subsidies - Will Others Follow?
12/03/08 12:06
China, the world’s #2 oil consumer behind the US, has demonstrated a remarkable show of economic force: it eliminated fuel subsidies and let oil prices float. Better yet, it increased gasoline tax 500% and diesel tax 800% to about $0.14 per liter ($0.50 per gallon.)
OPEC predictably reacted allergically but the real question is will other fuel subsidizing countries like India, Mexico and Indonesia follow? Here’s why they can and should now.
China’s timing couldn’t be better: oil prices are falling so subsidies can be removed with consumer shock - and taxes can be raised as well.
This has three major benefits:
1. Consumers exposed to fuel price fluctuations moderate their own demand as prices rise. For example, US oil consumption declined 8% as fuel prices rose in 2008.
2. Government finances are not strained by oil price fluctuations. China suffered riots this year when it suddenly raise prices over 20% earlier this year as it could no longer afford to subsidize fuel costs.
3. Government tax revenues rise with economic development and fuel prices - making them a partner in the game.
To be fair, China’s policy is far from perfect: it has created loopholes big enough to drive a tractor through: taxi drivers, farmers and industrial producers will apparently get increased fuel subsidies - creating potential for an enormous black market of fuel resold from farmers to car owners. China also says it will cap fuel prices if they rise too high but at a price to be determined.
But it’s an enormous positive step - one that we should congratulate China for, and encourage every other fuel subsidizing nations to adopt.
This has three major benefits:
1. Consumers exposed to fuel price fluctuations moderate their own demand as prices rise. For example, US oil consumption declined 8% as fuel prices rose in 2008.
2. Government finances are not strained by oil price fluctuations. China suffered riots this year when it suddenly raise prices over 20% earlier this year as it could no longer afford to subsidize fuel costs.
3. Government tax revenues rise with economic development and fuel prices - making them a partner in the game.
To be fair, China’s policy is far from perfect: it has created loopholes big enough to drive a tractor through: taxi drivers, farmers and industrial producers will apparently get increased fuel subsidies - creating potential for an enormous black market of fuel resold from farmers to car owners. China also says it will cap fuel prices if they rise too high but at a price to be determined.
But it’s an enormous positive step - one that we should congratulate China for, and encourage every other fuel subsidizing nations to adopt.
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