Streetwise Professor

February 13, 2008

The G-7 on China & India Oil Price Controls/Subsidies

Filed under: Commodities,Economics,Energy — The Professor @ 10:43 am

Catching up with several 2007 SWP posts, the G-7 finance ministers have called for China, Indonesia, and India to end price controls on oil (and the associated subsidies) because these encourage inefficiently high consumption. According to the linked Economic Times (India) article, Indonesia spends $11.5 billion to subsidize fuel; India $2.8 billion; and China $2 billion.

The article does not state whether the G-7 or any commentators have provided estimates on the additional consumption of oil that has resulted from these policies, or the impact on the world oil price. Nor have I been able to track down (via Google) any other articles or statements containing this information. Given the magnitude of the subsidies, and the inelasticity of oil supply, the quantity and price effects are unlikely to be trivial.

It’s good to see that this issue is finally getting some visibility, and that decision makers in the G-7 countries understand the world wide effects of these price controls. I wish I could be more sanguine that things will change, but I seriously doubt they will.

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