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We are subsidizing the increased price of oil

This one should be obvious – governments subsidize the price of goods or add tariffs to imports as a way to stimulate the local economy. The problem is, you can’t just turn it off; when you do, people feel real pain as jobs are lost, capacity is lost, and the general economy depresses.

After reading an article about banks reducing loans in the US, I read another article, “Fuel Subsidies Overseas Take a Toll on U.S.” from the NY Times. This one talks about the effect fuel subsidies around the world are having on the consumption, and therefore price, of oil products.

It isn’t just the U.S. that’s affected; all countries pay a higher price for oil when demand rises. As the article notes, countries that subsidize fuel costs are paying higher and higher subsidies, decreasing available money for other investments, like food production.

Removing subsidies, though, would cause significant local economic upheaval. The local economies have come to depend upon lower cost fuels, and sudden removal would cause disruption, not evolution.

However, I also wonder how much aid we provide to, say, Indonesia, which has one of the largest subsidies based on percentage of budget. I found this quote at the USAID web site:

One-third of Indonesia’s population does not have access to clean water. About 225,000 newborns and children under five die each year from preventable, poverty-related diseases. For every 100,000 live births, more than 300 women die.

I wonder if part of the subsidy money could be used to improve conditions for their own people.

And while I couldn’t find a total aid figure on the USAID web site (interesting, no?), I found this quote from a news story in 2007:

After a four-year stint as USAID Indonesia director, William M. Frej, who managed to get US$1.2 billion aid for Indonesia, is leaving the country this week.

So we’re helping increase the price of oil by subsidizing Indonesia to the tune of $1.2 billion; note that their subsidy on fuel for 2008 is $4 billion. If Indonesia reduced their subsidy by $1.2 billion, we wouldn’t have to send them our taxpayer dollars.

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