Fuel Subsidy

ftse100

I was just reading an interesting article on Bloomberg about the price of fuel in Venezuela. The Government basically subsidises the full cost of fuel resulting in the cost of a litre of petrol coming to a grand total of $0.015.

I think it's mad how they can do this?

Let's say the Irish Government subsidised fuel to such an extent what would the pro's and con's be?

This may be a stupid question but I'd like to know from an economist out there how it would affect Ireland's economy?

FreudianSlippers

Considering they have one of the largest oil reserves in the world, it's no surprise. On the other hand, cheap fuel but massive inflation and apparently a bottle of water is like US$4

antoobrien

ftse100 wrote: »

I was just reading an interesting article on Bloomberg about the price of fuel in Venezuela. The Government basically subsidises the full cost of fuel resulting in the cost of a litre of petrol coming to a grand total of $0.015.

I think it's mad how they can do this?

Let's say the Irish Government subsidised fuel to such an extent what would the pro's and con's be?

Cost to the exchequer in 2013 would be about €3bn in lost taxes & either the cost of buying the oil and refining it to petrol or the cost of buying refined petrol. The excise & vat figures are on the revenue website if you want to try to work it out.

So the pros would be cheaper fuel with more money in people's pockets.

The cons would be
Increased taxes to counteract losing €3bn out of a revenue base of 56bn (2014 figures) - so you're taking about foregoing over 5% of the budgeted revenue. That would mean higher taxes in other places to offset it (e.g. rising creating an 8% USC band to replace the income lost by increasing the lower thresholds and lowering the rates).
It would blow the stated plans to move the car fleet to EVs
Probably more people using cars thus affecting the road network (which is happening already as people return to work and the price of fuel drops)

sarumite

You have to buy elections somehow. The situation in Venezuela is a little unique in that the late Chavez and his henchmen were using Venezuelas oil as their personal campaign fund to keep their regime in power. In a properly functioning democracy the government shouldn't and wouldn't be given the freedom to plunder the nations wealth in the same way Chavez abused the office of president in Venezuela to do so.

hfallada

There is also the possibility of arbitrage. Which is the buying of goods in a low cost market and selling in a higher market eg you see uk cola being sold in €2 stores in ROI. The coke is only designed to be sold in the UK, but ends up being sold in ROI too, due to the price differences in buying cola in Ireland.

Its also certain the most of NI, would buy their fuel in Ireland. Plus there would be the risk of tankers buying fuels in Ireland, to sell elsewhere in Europe, due to the fact you can make a profit without any risk, as you are buying petrol for 5 cent and can sell with all the taxes paid in Germany for a significant profit.

Fuel subsidies are causing massive issues for 3rd world countries like Egypt. The Government badly needs to manage its cash flow, but instead is subsiding fuel for no good reason other than for good politics.