Why Is There Increased Oil Consumption in Oil-Exporting Countries?

The New York Times reports that oil consumption is increasing sharply in the oil-exporting Gulf States:

The economies of many big oil-exporting countries are growing so fast that their need for energy within their borders is crimping how much they can sell abroad, adding new strains to the global oil market.

Experts say the sharp growth, if it continues, means several of the world’s most important suppliers may need to start importing oil within a decade to power all the new cars, houses and businesses they are buying and creating with their oil wealth.

Indonesia has already made this flip. By some projections, the same thing could happen within five years to Mexico, the No. 2 source of foreign oil for the United States, and soon after that to Iran, the world’s fourth-largest exporter. In some cases, the governments of these countries subsidize gasoline heavily for their citizens, selling it for as little as 7 cents a gallon, a practice that industry experts say fosters wasteful habits.

The NYT article has a substantial flaw: it fails to note that the oil-exporting countries that they mention by name that are consuming more subsidize oil consumption, that is, gasoline is sold below market prices. The reason that’s a flaw is that the article is implying that the reason for greater consumption in these countries is greater wealth. The effects of greater wealth (which in oil-exporting countries tends to be highly concentrated) need to be disaggregated from the effects of the subsidies.

The real story, which I think is missed by the NYT report, is that governments that subsidize oil consumption face a difficult choice as world oil prices rise and, in many cases domestic production falls. If they increase their subsidies to match the rising prices, that leaves less money available for doing other things (including lining the pockets of the rulers of many of these countries). If they reduce their subsidies, they face political unrest.

Have I mentioned that China subsidies oil consumption?

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  • And Iran is the poster child. The costs of importing gasoline and the costs of price subsidies consume about a fifth of Iran’s total annual revenue alone. It is a nasty cycle for Iran since Iranians view cheap gas a a right and it’s so cheap that consumption has grown wildly in recent years.

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