OPEC can't afford to give residents cheap oil

OPEC can’t afford to give residents cheap oil

Bargain price oil is a standard perk for residents of crude-exporting nations. But the practice is expensive for members of the Organization of the Petroleum Exporting Countries, which meets in Vienna this week. It's well past time for a change, says Christopher Swann

June 13, 2012 5:42 by Reuters

Bargain price oil is a standard perk for residents of crude-exporting nations. To the governments which set the low domestic price, such subsidies look like a way to buy popularity without any cash outflow. But the practice is expensive for members of the Organization of the Petroleum Exporting Countries, which meets in Vienna this week. It’s well past time for a change.

Overall the 12 countries guzzle 57 percent more oil than a decade ago, according to figures from Deutsche Bank, with Saudi Arabia using nearly twice as much. Smaller members have been on the same course. Consumption has trebled in Angola, doubled in Ecuador and climbed 55 percent in Venezuela. OPEC members also seem to be becoming less efficient. Oil usage per head is up 24 percent since 2000, Deutsche says, while it is flat for the globe as a whole.

The habit of doling out cut-price crude to citizens is largely to blame. Thanks to excise taxes, drivers in developed economies generally pay much more than the market price per gallon of petrol. Thanks to sub-market prices, OPEC motorists pay much less, and have little financial incentive to ration their use.

For importers, the uneven treatment is costly. The wasteful consumption in exporting countries reduces the supply available for the global market, presumably pushing up the price. It also cuts into the potential reserve capacity, making the price more volatile.

But OPEC members don’t really gain, either. Governments lose potential export revenue and state-owned oil producers lose potential income. In 2010, the opportunity cost of discount domestic pricing was roughly 15 percent of OPEC’s total oil export revenue of $770 billion, according to International Energy Agency calculations. Such largesse adds to the fiscal strain on many of these nations – contributing to the exporters’ hunger for ever higher global oil prices.

Of course, weaning the public off cheap oil is no mean feat. Nigeria’s government recently backed down after trade unions protested against proposals to end subsidies on imported petrol. But as domestic oil consumption rises, OPEC nations have more to lose from refusing to bite the political bullet.

(Editing by Edward Hadas and David Evans)