The unintended consequences of energy subsidies
Do energy subsidies stifle innovation and hurt society in the long run?
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Ahead of the World Economic Forum Summit on the Global Agenda starting in Abu Dhabi from Monday, Badr Jafar, vice chair of the Global Agenda Council for Energy Security and managing director of Crescent Group, called on the delegates to examine the market distortions and impediments to innovation created by energy subsidies in the Middle East and North Africa (MENA) region.
Highlighting key findings of the recent research report issued in October by the World Economic Forum’s Energy Security Agenda Council titled “Lessons drawn from reforms of energy subsidies,” Jafar, also president of the Crescent Group’s subsidiary Crescent Petroleum, referred to the unintended adverse consequences of energy subsidies.
According to the report, the International Energy Agency (IEA) found that $532 billion was spent on energy subsidies globally in 2011, a significant figure which, it argued, has impeded the work of market mechanics. In addition, recent research from Standard Chartered found that energy subsidies within the MENA region are equivalent to $237 billion annually, which is approximately half of the global total.
The council’s report concluded that although energy subsidies can generate short-term gains for stakeholders, they also create distortions, which leads to inefficiency across the market in the long-term, including inappropriate resource allocation, production inefficiencies and wasteful consumption.
Jafar was quoted in Arab News as saying: “The need to highlight the long-term distortions created by energy subsidies is growing, especially as market inefficiencies are becoming entrenched such that the drive for innovation and change in patterns of energy use is being constrained. More than any other part of the world, the MENA region has both the need and the opportunity to develop a concerted agenda for the adjustment of these subsidies. Our position as both significant hydro carbon producers and increasingly major users of the energy, combined with already clearly stated policies to diversify our economies, places the Middle East region at the forefront of this important economic development.”
The Energy Security Council’s review also contained a detailed analysis of the impact of energy subsidies in Jordan. The country embarked on a program of phased subsidy reduction in 2005, aiming to achieve a gradual elimination over three years. Although this period coincided with buoyant oil prices, the Jordanian government successfully removed most subsidies, enshrining the alignment of local and international pricing through the creation of public protocols, and reviewing pricing regularly.
The council also acknowledged within the report that energy subsidies cannot be withdrawn precipitously but instead called for phased reform across all markets, allowing for more efficient market operation and encouraging greater innovation in energy production and use.
Jafar added: “I believe that economies within the Gulf region have both the vision and the financial scope to emulate the Jordanian example, utilizing the strength of our economies and enacting policies quickly to offset any unintended social impact produced by subsidy reduction. There is a clear economic imperative to allow our markets to operate efficiently. In the long-term, the positive impacts on the efficiency of our markets will provide much greater societal benefits.”
Key findings of the GAC report will be addressed at the three-day summit that runs up to Nov. 20. Described as the world’s largest brainstorming session, the event will bring together over 900 international leading thinkers from government, business, academia and civil society to debate and generate transformational ideas that will shape a greener and more inclusive future.
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