Friday, October 10, 2008

Gas & Energy Subsidies in Barbados

Here are some links to a recent announcement by the government of Barbados lowering the price for gasoline and diesel fuel.

Nation News article
Barbados Advocate article

Yes, the price of gasoline is controlled by government in Barbados, rather than being determined by supply and demand. The price is set artificially low. Under normal supply and demand conditions, this would result in a market shortage (P < P* means that quantity demanded will exceed quantity supplied). However, in this case, the government of Barbados makes up the differential between the true market price and the price ceiling by directly paying the oil supplier. This prevents the shortage, but of course amounts to a subsidy for gas and diesel consumption... the opposite of a tax. Taxpayerswill (eventually) pay this debt.

You'll note in the articles that electricity consumption is also subsidized. Electricity of course is generated by burning fossil fuels. In the case of Barbados and most of the Caribbean, electricity comes from combustion of oil and coal.

What are the environmental implications of these subsidies?
Do these subsidies encourage or hinder the push for alternative energy sources?


Cole Yates said...

I don't have an answer to the specific question but instead i have my own question and idea. We always talk about oil supplies and oil prices and how the the decrease in supply and increase in price should influence a push towards alternative energy. However, what is motivating either the oil suppliers or the vehicle manufactures to move towards an alternative? Neither one is backing down, the oil suppliers "fuel" the vehicle manufactures production and vise versa. To make a push towards alternative energy sources, one is going to back down first, who is it going to be?

Drew Moxon said...

What you have to do is decrease demand either by increasing price (carbon tax, ect.) or through changing consumer preference. Many oil companies have started investing in renewable energy (admittedly in small amounts) as a hedge against future change in consumer preference. Despite the recent drop in oil prices, oil demand is going down. This seems to be because the demand curve is shifting left because of new consumer preferences (that...and people are scared of an unstable economic marketplace). As always, much of it is in the hands of consumers.

Dr. Peter Schuhmann said...

In response to Cole's question, it certainly will not be the oil manufacturers or oil exporting nations that back down first. For example, Saudi Arabia has a huge incentive to keep oil as the principle input for transportation energy. Contrary to what you might first think , they'd like to keep the price of oil low -- at least low enough to prolong the switch to an alternative. Unfortunately, the US government also has a huge incentive to keep the price of oil low, as our country is so big geographically, that cheap transport is a necessary component of economic growth.

As for the auto manufacturers, if the price of oil stays high (looking increasingly doubtful) then I don't think they have a choice but to make the transition. The US big 3 (GM, Ford, Chrysler) are all doing miserably. A functional and reasonably priced plug-in hybrid (or better yet electric car) may be the only thing that can save them.

The Keeper said...

"...registered farmers, fishermen and private public service vehicles operators would continue to benefit from previously announced diesel concessions" As I see this doing is enabling a life style that is facilitates excess. If I have ever seen wealthy fisherfolk and farmers its in Barbados. I am wondering how comes farm products are so expensive in Barbados compared to other Caribbean countries. It's certainly not the tourist. I have also observed that price in barbados is more likely based on ability to pay rather than real value of commodity. A friend of mine payed $8.60 cents for eight bananas at a well know location in Oistins in. In St. Lucia that will buy you the entire bunch!

These subsidies will cost the taxpayers a bundle. More than they already pays. Personally I believe the government of barbados needs to get out of many areas in which it provides good and services. It can set guidelines for operations but get out. For example, public transportation. Any deficit incurred will burden taxpayers for along time. Besides the tourists will pay as well as business owners attempt to pass on costs to customers especially visitors.
Eventually Barbados will become expensive, polluted (from cheap fuel because its subsidized), and unattractive. Visitors will go to neighboring islands like the Tobago Cays.

Consider, if the market is allowed to work, maybe car-pooling will occur as a general practice. There are too many cars with single occupants driving too slow to go hang out with friends. Rod ways are clogged full of traffic between 6:4am5 and 6:45pm. For a small country thats too much stress on the environment. As that not enough too many of the occupants litter indiscriminately, especially in the night. In the day when you visit the shows.

This is good time to allow market based mechanisms to work. It will definitely have a knock on effect on some of the undesirable elements affecting the environment.


Jeanel said...

Low prices means greater quantity demanded therefore, subsidized gas will boost consumption,increase dependency on fossil fuels, increase pollutants and decrease incentive to develop alternative energy sources.
the Caribbean has ready access to a number of potential alternative energy sources: solar,hydro, wind and wave. Some islands are also investigating a geothermal option. Taxes collected should be put into developing these alternatives rather than paying back the debt incurred from subsidized fuel.

Neribee said...

Believe it or not, this is all about political administrator’s short sightedness in only seeing as far as the next election and nothing about sustainable development. Government subsidies on gas and energy will eventually be paid for by the tax payers. This is a matter of digging one hole to fill another hole!
This superficial approach is not the solution. The market mechanism should be allowed to take it course while incentives be provided to develop alternative sources of energy.

Brad Coffey said...

I think it's interesting that they are able to justify subsidizing fuel use. That sounds a lot like a "let's just print more money" solution. It doesn't sound like they have an answer for the accumulating national debt. Something I would propose would be to have tourist taxes to cover the subsidies. It seems like an area such as the Caribbean that is highly dependent on tourist revenue could cover such costs. For example the duty free rum that I bought in Nassau last year could have a small tourist tax on it, and it would still be a deal for me as long as it would be less than what I could pay for it here in the states. Anyone see anything wrong w/ this?

Neribee said...

Imposing duty on rum is indeed another viable option to increase revenue. Considering that this product is not a necessity, there is no reason why an increase in “alcohol tax” was not done. Tourism and locals alike will still consume Caribbean rum no matter the price! Subsidy on gas is indeed a retrogressive action.