There are costs, and then there are costs (abstract):
The Economic Cost of Global Fuel Subsidies
Lucas W. Davis
By 2015, global oil consumption will reach 90 million barrels per day. In part, this high level of consumption reflects the fact that many countries provide subsidies for gasoline and diesel. This paper examines global fuel subsidies using the latest available data from the World Bank, finding that road-sector subsidies for gasoline and diesel totaled $110 billion in 2012. Pricing fuels below cost is inefficient because it leads to overconsumption. Under baseline assumptions about supply and demand elasticities, the total annual deadweight loss worldwide is $44 billion. Incorporating external costs increases the economic costs substantially.
The equivalent of about 40% of the value of subsidies is effectively a deadweight loss – the efficiency loss associated with overconsumption due to market prices below the market-clearing level.
In addition, the paper estimates the costs arising from negative externalities, such as pollution, health costs and traffic congestion, which amount to USD1.10 per gallon, or approximately USD0.29 per litre. At today’s exchange rates, that’s about RM1.00 per litre, over and above the dollar cost of subsidies.
The total global economic cost of fuel subsidies therefore is USD44 billion plus USD32 billion in externalities for a grand total of USD76 billion – every single year.
Where does Malaysia stand? We’re in the top ten in the world in terms of the absolute value of fuel subsidies, and in the top twenty in per capita petrol consumption, which is amazing considering our demographic profile.
Neither mark is one to be proud of. Fuel subsidies simply have to go.
Lucas W. Davis, "The Economic Cost of Global Fuel Subsidies", NBER Working Paper No. 19736, December 2013