From Nairobi To Tehran: Costly Fuel Is Never Far From A Match

THERE are deep roots to Myanmars current unrest, pitting its repressive regime against Buddhist monks, but the immediate spark was the juntas unexpected decision in August to double fuel prices. Overnight, diesel prices skyrocketed, and compressed natural gas rose fivefold.

In this respect, Myanmar is not an isolated case. Rising oil prices in recent years have created all kinds of headaches as they have rippled across the world. Many governments, especially in the developing world, have had to choose between raising domestic subsidies to offset the increases or letting the people bear the brunt.

Neither choice — higher government spending or the risk of popular discontent — has great appeal.

In oil-rich Iran, civil unrest spread through Tehran this summer after the government rationed gasoline in an effort to curb the countrys addiction to cheap fuel; gasoline in Iran, imported because the country lacks refining capacity, is heavily subsidized and cost about 40 cents a gallon at the time. After two days of upheaval, the Islamic theocracy restored order and kept the policy.

In Nigeria, the outcome was different. Striking oil workers in June threatened to shut down the countrys oil production if fuel subsidies were dropped. Faced with the threat of losing its biggest source of revenue, the government quickly backed down.

Fuel prices go to the heart of peoples ability to move, stay warm or feed themselves. So it is no surprise that governments around the world have tried to blunt the effects of oil prices that have tripled in the past four years.

But interfering with energy markets can be a risky and costly game. Prices kept high by market forces and taxes dampen expectations of cheap fuel. Fuel subsidies do the opposite, and countries that rely on them play with fire.

Some countries are hiding the reality of high fuel prices to keep political peace, said David L. Goldwyn, an assistant secretary of energy during the Clinton administration. Nigeria caved, but its not a sustainable strategy. The more they do it, the more they pump up demand with cheap energy.

The problem is that fuel subsidies can quickly add up — especially when oil prices keep rising as they have since 2003. It has been estimated that Yemen, for example, devotes 9 percent of its gross domestic product to holding down energy prices.

Only a handful of countries provide very high subsidies on their retail fuel sales. These include Venezuela, Turkmenistan, Syria, Algeria, Angola and Malaysia, and, unsurprisingly, most of them are oil producers.

In fact, most countries have allowed domestic prices to creep up. Drivers in Tunisia, Honduras and Pakistan all paid more for their gasoline than Americans did last year, according to a survey of fuel prices compiled by GTZ, a German consulting firm. The survey found only 20 countries where the price of gasoline was below $2 a gallon, that is, lower than the cost of refining it.

In most European countries, the opposite is true. Governments slap on high taxes — sometimes as high as 80 percent of the cost — in part to discourage consumption. In the Netherlands, gasoline cost $6.40 a gallon last year.

In the United States, where taxes represent about 20 percent of gasoline prices, regular gas averaged about $2.35 a gallon last year. Its up to $2.80 these days. Still, the mere mention of raising gasoline taxes remains almost tantamount to political suicide.

When it comes to energy policy, the most closely watched country is China, whose surge in demand has helped propel oil prices upward. China needs to finely balance its need for growth while trying to keep a lid on energy use, both to control pollution and to keep prices from skyrocketing.

Though pollution has taken a toll on Chinas environment, the restive demands of the rural have-nots left far behind by the urban haves cannot be ignored. Last year, there were 90,000 protests against local governments, according to Michael Green, a senior adviser at the Center for Strategic and International Studies.

In most cases, fuel prices were not the cause of these protests, Mr. Green said, but they point to the risk of upheaval China faces: Each year, 20 million people move to big cities from the countryside in search of work.

The mandate of the Communist Party is economic development, Mr. Green said. This is why it is so hard for them to ration energy demand. Its very difficult for the leadership in Beijing to develop a harmonious society if they cap energy demand.

Still, the Chinese leadership has been gradually allowing fuel prices to increase, although its domestic state-run refineries still sell gasoline at a loss.

Indonesia illustrates the risk for authoritarian regimes. In 1998, large-scale student riots sparked by higher energy prices led to the fall of the autocratic president, Suharto. But in recent years, the Indonesian government has managed to cut back its subsidies without sparking dangerous riots.

The more authoritarian the regime, the more vulnerable it is to mobilized dissent when they try to raise energy prices, Mr. Green said. When democratic institutions are stronger, governments have been better able to manage energy demands. Thats the lesson from Indonesia.

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