How Long Can Some Countries Continue Suppressing Gasoline Prices?

Lynne Kiesling

Randall Parker has a post noting that in May 2008, vehicle miles traveled in the U.S. fell 3.7% relative to May 2007. Not surprising, given that prices have risen by about, say 37% (giving us an estimated price elasticity of demand of -0.1, which is higher than normally seen, so yes, we have moved up into a more elastic portion of the demand curve).

His comments and links are informative. I’d like to highlight one interesting point that he makes that hasn’t been discussed much, but that I think deserves more attention and more analysis:

The big question: when will the subsidizing governments find they can not afford to subsidize any longer? When will the full weight of oil market prices reach Chinese, Indonesians, Indians, Saudis, Venezuelans, and others who pay below market prices for gasoline, diesel fuel, kerosene, and other oil products?

Consumers in these countries do not see transparent price signals for gasoline, due to government intervention to suppress retail prices. We do not face such suppression. What effect does/will that have on demand, growth, and innovation? High prices induce substitution, including innovation beyond the short run. This is a great example of how market processes enable adaptation to changing conditions. I’d bet that we’ll have more innovations in energy efficiency here than in those countries that subsidize gasoline.


4 thoughts on “How Long Can Some Countries Continue Suppressing Gasoline Prices?

  1. 1) Real income and population were higher in May 2008 than in May 2007, which I would think should shift demand outward. Demand would have to be a little bit more elastic than that, I would think, for quantity demanded to drop over that time. (Or maybe short-term demand — on a one-year scale — is dropping due to adjustments to longer-term higher prices — on a five-year scale. I guess I figured the wealth effect would be bigger. I’m not volunteering to do the detailed econometrics.)

    2) The NY Times had an article about fuel subsidies recently.

    Note that many of those countries are already, according to the article, letting domestic prices climb:

    Before adjusting the prices, Malaysia was spending 7.5 percent of its entire economic output on fuel subsidies, a greater share than any other nation. Indonesia follows with 4 percent.

    The answer to your question appears to be “not much longer, at least not at old rates”.

  2. For the net exporters, maybe never. The opportunity cost just isn’t as real to political leadership as shelling out real cash, and since more exports of oil would appreciate the currency and make other exports more uncompetitive, might even seem to be desirable industrial policy. But for the net importers, things are starting to get unacceptably expensive. We know the Chinese have already cut prices and everyone else is talking about it.

  3. This is something that has been confusing me for a while. I am from India and I am aware that my govt subsidises Petrol and Diesel for me. Diesel is subsidised much more than petrol.

    Here’s my admittedly anecdotal evidence.

    In July 2006 I paid Rs.44/litre of petrol which translates to around $3.75/gallon (at 2006’s exchange rates)

    In July 2007 I paid Rs.47/litre of petrol which translates to around $4.33/gallon (at 2007’s exchange rates)

    Now in July 2008, I am paying Rs.54/litre of petrol which translates to around $4.73/gallon (at 2008’s exchange rate).

    If my Govt. is subsidising my petrol why am I paying much higher prices than in the US?

    Two links to help you.

    http://www.gadling.com/2007/06/26/the-price-of-gas-around-the-world/
    http://www.kshitij.com/research/petrol.shtml

  4. This is something that has been confusing me for a while. I am from India and I am aware that my govt subsidises Petrol and Diesel for me. Diesel is subsidised much more than petrol.

    Here’s my admittedly anecdotal evidence.

    In July 2006 I paid Rs.44/litre of petrol which translates to around $3.75/gallon (at 2006’s exchange rates)

    In July 2007 I paid Rs.47/litre of petrol which translates to around $4.33/gallon (at 2007’s exchange rates)

    Now in July 2008, I am paying Rs.54/litre of petrol which translates to around $4.73/gallon (at 2008’s exchange rate).

    If my Govt. is subsidising my petrol why am I paying much higher prices than in the US?

    Two links to help you.

    http://www.gadling.com/2007/06/26/the-price-of-gas-around-the-world/
    http://www.kshitij.com/research/petrol.shtml

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