Subsidies and Fuel Prices
The high cost of fuel is no secret these days. No matter where you are around the world, fuel prices are a tremendous issue. Whether you are earning an average or above average income, the increased cost of fuel is having an effect on the way you live. People are buying smaller, more economical vehicles and driving less. They are carpooling more and many are changing jobs, opting for a lower salary closer to home so they can save fuel costs.
When fuel started inching toward $3 per gallon, people were getting worried and upset. Now that the price per gallon is over $4 per gallon, people are besides themselves worrying about how to make the dollars stretch.
The question is: What pushes the cost of fuel up so high? The answer, in part, is subsidies. The way subsidies work is that various countries such as Mexico, India and China subsidize their motor fuel. What this does is encourage consumption of fuel and make the prices rise while the governments of those countries make up for the deficit at the pump for their consumers. Research indicates that countries with subsidies accounted for over 95% of the increase in oil use around the world in 2007. Because of this, prices rose to alarming levels, and in some countries like the United States, demand for oil fell because prices were allowed to rise.
Subsidies are a big factor in creating an imbalance between supply and demand of fuel, therefore pushing oil prices up and making it hard for consumers to afford it. As a result, other parts of the energy and economic equation are affected, such as automobile sales – especially luxury cars and SUV’s. These high-ticket items were often acquired by consumers who leased them from the automakers on long-term leases. As the fuel crisis has deepened and the economy has changed automakers have taken huge losses due to these leases. So deep, in fact, that Chrysler will no longer offer leases.
In addition, individuals who have purchased these vehicles that consume a great deal of fuel have taken losses personally, as well, adding further to the economic problems resulting from the fuel crisis. Adding all these factors together has created a situation that is creating a strain on individuals, families and entire countries.
While economists search for a solution, one thing is clear: fuel prices will not be going down in the near future and it is essential to continue looking for alternative sources of energy to replace or supplement subsidies. We need to find ways to deal with the fuel crisis head on, eliminating or adjusting artificial fixes and developing real solutions now.