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  • [ March 29, 2013 ]
  • What is the true cost of gasoline?

A new report from the International Monetary Fund (IMF) says gasoline is underpriced worldwide. While the average consumer may not see the problem with low-cost gasoline, the IMF fears the low prices at the pump may be contributing to budget deficits, excessive energy use, underinvestment in energy technology, and rapid climate change.

Currently in the U.S., the price of gasoline covers the cost of production and distribution, not the societal impacts, such as traffic, pollution, and global warming.

In other countries, especially in the developing world, governments set gasoline prices much lower than the cost of production, stimulating unnecessary energy consumption. For example, gas in Saudi Arabia only costs 45 cents a gallon.

To achieve low prices for gasoline, governments worldwide spend about a half a trillion dollars annually in direct subsidy, coming from tax payer money. Worldwide that is about two percent of government revenues, but particularly in the Middle East and North Africa, it is about 20 percent of revenues. While the U.S. does not do a large amount of regulating energy prices through direct taxpayer subsidy, it does offer tax breaks for oil and gasoline exploration.

When the total “underpricing” of energy is added up, the IMF said it amounts to about one and a half trillion dollars annually. The report suggests that if the huge amount of energy subsidies are reduced, it could help reduce government spending deficits, and global warming.

The politics behind reducing energy subsidies is complicated because it would directly relate to higher prices for consumers, and could leave the poor unprotected.

Click here for the IMF’s Energy Subsidy Reform: Lessons and Implications document.

Source: IMF: Gas Prices Don’t Reflect True Costs, NPR.

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