Determinants of oil price subsidies in oil and gas exporting countries

This paper investigates the implicit subsidization of refined products in oil and gas exporting countries. Most of these countries, as well as some other countries (mostly developing countries, but one could argue that US gasoline prices do not account for external costs), distribute large subsidies. Subsidies that are offered for a long period, are not only inefficient, but also dangerous due to gradual increases in the energy demand. Low domestic prices have led to immense oil demand growth that cannot continue if these countries wish to continue exporting. Only very high price jumps can stop this development, but politically these price jumps are very costly, if not suicidal, for many governments. Indeed, we argue that the currently low oil prices not only harm oil and gas exporting countries, but also provide a unique opportunity to eliminate this costly subsidy policy at manageable political costs. This paper begins with theoretical, normative and positive explanations of low domestic energy prices, and then addresses how to phase out subsidies, again from a normative and positive perspective. Finally, we empirically address the obstacles that individual countries may face when attempting to eliminate subsidies by quantifying the factors (political, economic, and social) that influence the existing subsidies.