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Fuel subsidies, the oil market and the world economy

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  • Nathan S. Balke
  • Michael D. Plante
  • Mine K. Yücel

Abstract

This paper studies the e ffects of oil producing countries' fuel subsidies on the oil market and the world economy. We identify 24 oil producing countries with fuel subsidies where retail fuel prices are about 34 percent of the world price. We construct a two-country model where one country represents the oil-exporting subsidizers and the second the oil-importing bloc, and calibrate the model to match recent data. We find that the removal of subsidies would reduce the world price of oil by six percent. The removal of subsidies is unambiguously welfare enhancing for the oil-importing countries. Welfare can also improve in the oil-exporting countries, depending upon the extent to which they are net exporters of oil and on oil supply and demand elasticities.

Suggested Citation

  • Nathan S. Balke & Michael D. Plante & Mine K. Yücel, 2014. "Fuel subsidies, the oil market and the world economy," Working Papers 1407, Federal Reserve Bank of Dallas.
    • Handle: RePEc:fip:feddwp:1407
    DOI: 10.24149/wp1407
    Note: Published as: Balke, Nathan S., Michael D. Plante and Mine K. Yucel (2015), "Fuel Subsidies, the Oil Market and the World Economy," The Energy Journal 36 (S): 99-127.
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    References listed on IDEAS

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    1. Christiane Baumeister & Gert Peersman, 2013. "The Role Of Time‐Varying Price Elasticities In Accounting For Volatility Changes In The Crude Oil Market," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 28(7), pages 1087-1109, November.
    2. Hausman, Jerry A & Newey, Whitney K, 1995. "Nonparametric Estimation of Exact Consumers Surplus and Deadweight Loss," Econometrica, Econometric Society, vol. 63(6), pages 1445-1476, November.
    3. Mr. Robert Gillingham & David Locke Newhouse & Mr. David Coady & Mr. Kangni R Kpodar & Moataz El-Said & Mr. Paulo A Medas, 2006. "The Magnitude and Distribution of Fuel Subsidies: Evidence from Bolivia, Ghana, Jordan, Mali, and Sri Lanka," IMF Working Papers 2006/247, International Monetary Fund.
    4. Mr. Kangni R Kpodar, 2006. "Distributional Effects of Oil Price Changeson Household Expenditures: Evidence From Mali," IMF Working Papers 2006/091, International Monetary Fund.
    5. Hartley, Peter & Medlock III, Kenneth B., 2008. "A model of the operation and development of a National Oil Company," Energy Economics, Elsevier, vol. 30(5), pages 2459-2485, September.
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    7. Plante, Michael, 2014. "The long-run macroeconomic impacts of fuel subsidies," Journal of Development Economics, Elsevier, vol. 107(C), pages 129-143.
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    Cited by:

    1. Nida Çakir Melek & Michael Plante & Mine K. Yücel, 2017. "The U.S. Shale Oil Boom, the Oil Export Ban, and the Economy: A General Equilibrium Analysis," NBER Working Papers 23818, National Bureau of Economic Research, Inc.
    2. Jensen, Lars, 2024. "The economic and fiscal transition costs of global climate mitigation in fossil fuel export dependent economies," Resources Policy, Elsevier, vol. 96(C).
    3. Ginn, William, 2024. "The paradox of fossil fuel subsidies," Economic Analysis and Policy, Elsevier, vol. 83(C), pages 333-358.
    4. Zoundi, Zakaria, 2024. "Wells or Welfare? Macroeconomic implications of the Canadian oil subsidy," Economic Modelling, Elsevier, vol. 139(C).

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    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy

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