The Case For Oil Subsidy

Last weekend I attended a volunteer training camp in preparation of an advocacy campaign to raise fund for underprivileged children living in third world countries. The definition of poverty and discussion of ways to alleviate poverty naturally became the central theme of the camp. When oil subsidy was brought up there was such euphoria that I believed was due to common perception that we need oil subsidy to alleviate the hardship of the poor. My curiosity led me to reason deeper to what extent it really helps.

The commonly known principle of this perception is that oil subsidy relieves the poor from excess burden of rising costs of consumer goods and transportation. Indeed this is a valid reason, but if we look from the long-term sustainability perspective, we will see that oil subsidy is a superficial quick-fix that will cease along with dwindling oil revenue.

Notice that oil subsidy is mostly in a form of indirect benefits passed along by producers and service providers to the poor. But when there are no mechanisms and regulated policies in place, there is never any guarantee that the poor will benefit, simply because price hikes of daily necessities are contributed by dynamic factors beyond oil prices, producers and service providers may have no incentives to maintain product and service prices. The key point is that without a comprehensive feasibility study, oil subsidy that is supposed to help the poor may fail to reach this deserving group. The trickle-down theory that says when wealthy corporations benefit, the poor living by subsistence level will eventually benefit too has persistently failed to materialize in reality. That is why growing inequality among the rich and the poor amid channeled assistance in the form of oil subsidy is still a real threat.

Provision of oil subsidy also implies some form of compromise and expenditure cut will be required in other development programs that may include basic infrastructure projects that will actually benefit the poor most. It is important not to fall into populist demand that oil subsidy is what we need the most currently for the poor, it is a short-sighted assessment that does not take into account the multi-faceted root causes of poverty. Oil subsidy alone will not help the poor to lead independent and sustainable life. In fact, it can also pose as a disguise for the lack of concrete effort and investment from oil rich countries to continuously under-invest in human capital that form the basis for closing the gap of inequality, promoting competitive and sustainable growth. That is why resource-rich countries tend to suffer from what the economists called the paradox of plenty. These countries usually have the form of opaque and authoritarian governments with excessive dependence on petrol money to maintain superficial growth and struggle to reach developed economy status. Revenue from non-renewable resource is not going to be infinitely meeting their needs in future.

We are also living in a world with increasingly interconnected global economies, however many of us are still confined to narrow local perspectives. This is basically the reason why we rarely address the negative impact of oil subsidy toward our neighboring countries. Never mind that it distorts global market price, demand and supply; never mind that unrealistically subsidized oil prices encourage excessive usage for superficial growth and exacerbate environmental degradation; never mind that our poorer neighboring countries without rich oil resources take the brunt of pollution and unfairly outpaced in competition; never mind to pile more misery to their poverty for as long as we can progress faster then we do not really bother.

Yes, I am a proponent of moving toward free market price, it will compel the governments to be more efficient in development fund allocation, take long-term interest in human capital investment for economic growth, to be more responsible and ethically fair in global competition and environmental protection, and most importantly, adopt a more comprehensive long-term perspective to tackle poverty unaided by unrealistic subsidies. Therefore, the implementation of any aid policy and development program should fulfill the basic objective of gradually lifting the poor out of vicious cycle of poverty. There is no short-cut to replace sustainable development for the poor, not oil subsidy due to populist pressure.