Kevin Ramnarine: TT:
To subsidize or not to subsidize
To Subsidize or Not to Subsidize
The subsidy on petroleum products such as gasoline and diesel has its basis in the Petroleum Production Subsidy and Levy Act of 1974 which aims, among other things, to shield the population from the vagaries of international oil prices. This policy came about following the quadrupling of oil prices from 1973 to 1974 on account of the Yom Kippur War and the consequent Arab oil embargo of Western countries.
Other countries have similar fuel subsidies in place with the most extreme case being Venezuela where diesel is 1 US cent per liter. By comparison, in T&T we pay $TT 1.72 per liter for diesel or 26 US cents per liter (diesel is cheaper than bottled water in T&T). Interestingly, the most expensive diesel can be found in places like Norway and Sweden which are among the richest countries in the world.
In T&T, the subsidy is a function of the international oil price. This trickles down to what is called the ex-refinery price. This is the price at which Petrotrin sells gasoline and diesel to the two wholesalers Unipet and NP. The higher the international oil price is the higher the ex-refinery price of gasoline and diesel will be. Therefore, keeping the retail price at the pump constant requires a Government subsidy. Part of the subsidy is covered by a levy paid by the oil and gas companies.
In the last 15 years (2001 to 2015) the cost of subsidizing fuel was $TT 34.4 billion. This is about $US 5.2 billion or the equivalent of what is in the Heritage and Stabilization Fund. In times of high international oil prices such as 2011 to 2014 the subsidy averaged over $TT 4 billion per year. However, given that oil prices are currently low, the subsidy should be much lower.
At current oil prices (about $US 40 per barrel), there is no subsidy on Premium Gasoline. In fact when you put Premium Gasoline in your vehicle you are actually paying the Government about $TT 2.00 on every liter. At current oil prices there should be a small subsidy on Super Gasoline of about 15 TT cents. Diesel however remains subsidized by approximately $TT 1.10 per liter.
I guess that after spending $TT 34.4 billion a natural question would be – what do we have to show for that expenditure? It may be argued that the entire population has benefitted. But have some benefitted more than others? The argument one hears is the subsidy benefits the poor man. That may be somewhat true but the facts are that the fuel subsidy benefits the rich far more than any other group.
The subsidy also caused or causes an illegal trade in diesel. In 2011 the Ministry of Energy took the lead to deal with this scourge. I cannot say convincingly that it was stamped it out but I can say it was dealt a serious blow. The facts are that in 2010 the illegal trade in diesel was out of control. In 2011 the Ministry of Energy and other Government agencies coordinated efforts to treat with the problem. The result was a drop in the sales of subsidized diesel from 669 million liters per annum in 2010 to 536 million liters at the end of 2015. This is a difference of 133 million liters of diesel or a 20% decline. That can be attributed to the illegal trade in diesel which saw our subsidized diesel allegedly being sold in South America countries and to fishing vessels in the Southern Caribbean.
The other negative aspect of a fuel subsidy is the impact it has on energy efficiency, the environment and carbon emissions. Everyone talks about greening this and greening that. That is laudable. However, subsidies on gasoline and diesel won't help us get there. We have made a commitment to the United Nations at COP 21 to reduce our Carbon Dioxide emissions in the transportation sector by 15% by 2030. We should take this commitment seriously. What is the plan to get there? CNG and Hybrids are the way to go. I'm happy to see that CNG is starting to gain momentum and we are starting to see some more Hybrids on the roads.
The issue is not whether we need to subsidize or not to subsidize. The consensus in the academic community suggests that the subsidy on transportation fuels should go the way of the negative list and price controls. There is no economist worth his salt who thinks it should stay. The issue however is how the Government manages the removal of the subsidy. It should be removed incrementally and in a manner that manages inflationary pressure while allowing the country to adjust.
T&T has no option but to migrate towards a market economy. The alternative to that is a set of failed populist socialist policies which tells us to buy a subsidized steel plant that can't make money.
Kevin Ramnarine is the former Minister of Energy of Trinidad and Tobago. Petroleumworld does not necessarily share these views.
Editor's Note: This commentary was originally published by Guardian, on March 31, 2016. Petroleumworld reprint this article in the interest of our readers.
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Petroleumworld News 04/04/2016
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