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Thu March 28, 2013
IMF: Gas Prices Don't Reflect True Costs
Originally published on Thu March 28, 2013 8:18 am
DAVID GREENE, HOST:
It's MORNING EDITION from NPR News. Good morning, I'm David Greene.
LINDA WERTHEIMER, HOST:
And I'm Linda Wertheimer.
When you're filling up a car with gas, chances are you are not looking at the price per gallon and thinking how low it is. And maybe thinking that the government ought to do something about that and raise prices. But the economic wizards at the International Monetary Fund are recommending exactly that, not just for the U.S. but for the entire world.
So to find out what's that's about, we turn to David Wessel. He is the economics editor of The Wall Street Journal and a frequent guest on our program. David, good morning.
DAVID WESSEL: Good morning, Linda.
WERTHEIMER: So let me get this straight. Gasoline is selling for around $3.65 a gallon in the U.S. and the IMF thinks that's too low?
WESSEL: That's right. The IMF says that the price of gasoline in the U.S. covers the cost of producing and distributing it, but doesn't reflect all the costs that using gasoline imposes on society: traffic, pollution, global warming. But in other countries, particularly in the developing world, governments set gasoline prices artificially low - lower than the cost of producing it. In Saudi Arabia, for instance, gas goes for only 45 cents a gallon.
The result is that people here and abroad use more energy than they would otherwise. So the IMF says that subsidizing energy or mispricing it aggravates budget deficits, crowds out spending on health and education, discourages investment in energy, encourages excessive energy use, artificially promotes capital-intensive industries, accelerates the depletion of natural resources...
WESSEL: ...and exacerbate climate change. But other than that it's a great idea.
WERTHEIMER: So how much do governments spend subsidizing energy?
WESSEL: They spend a lot of money. About half a trillion dollars a year in direct subsidy that taxpayers pay for. That's two percent of government revenues worldwide - not that much. But in some countries, particularly in the Middle East and North Africa, it's more like 20 percent of revenues.
The U.S. doesn't do that much direct taxpayer subsidy or regulation of energy prices, though we do have those controversial tax breaks for oil and gas exploration. But when the IMF adds up all this under-pricing of energy, they say it comes to about a trillion and a half dollars a year.
WERTHEIMER: Now, David, we usually think of the IMF as worrying about money and rescuing countries that run short of money. Why are they worrying about energy prices?
WESSEL: Well, that's a good question. One reason is that they worry a lot about budget deficits. In a lot of countries, these energy subsidies are an enormous part of government spending, sometimes even equal to the size of their government budget deficits. Some governments spend more on energy subsidies than they do on education and healthcare. And nobody really thinks that's a great idea.
So what the IMF is saying is there's a twofer here: You can curtail these subsidies, reduce your deficits, and do something about global warming at the same time.
WERTHEIMER: But you wouldn't curtailing subsidies mean that poor people, or people who are living in poorer countries and already struggling, would have yet another cost going up?
WESSEL: Right. Well, energy subsidies are often defended as a way to help the poor. But actually they don't really target the poor. Think of it this way: If you're poor and you don't own a car, and you don't have an air conditioner, and the government subsidizes energy, electricity and gasoline, you don't get much benefit. If you live in the same country and you're rich, and you have two or three cars and five air-conditioners, you get a big benefit.
So there are ways to cushion the blow on the poor - giving them vouchers to buy energy cheaply, or giving them cash payments to offset subsidies or something.
The politics are tricky. But David Lipton, the number two at the IMF who's been pushing this idea, says this. He says it's better to do this the right way than to do it right away, but it's important to do it.
WERTHEIMER: But, of course, here in the United States you would raise the price by raising taxes. That doesn't sound likely.
WESSEL: It isn't likely. I think the only way that happens is if some day Congress does some of massive overhaul of the tax code and decides to deal with the deficit at the same time it deals with global warming. But that sure doesn't look like it's going to happen soon.
WERTHEIMER: David Wessel, economics editor of The Wall Street Journal, thank you.
WESSEL: You're welcome. Transcript provided by NPR, Copyright NPR.