Wednesday, June 4, 2008

Oil Subsidies

An interesting Morgan Stanley report about oil subsidies in emerging markets has been excerpted here. The basic idea is pretty simple. China, Saudi Arabia, India, etc ... have government subsidies of fuel prices. At the moment, they estimate that 22% of world fuel consumption is subsidized. It's very hard to get people to conserve on something they don't have to pay for, and so no demand is destroyed as prices rise. The result: further prices increases in oil and deteriorating fiscal positions and inflation in these markets. Some of these countries, particularly India, are having trouble maintaining this level of subsidization, and are likely to cut back in the future.

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